India’s banking sector may witness a liquidity crunch in the coming few days. Even though Reserve Bank of India (RBI) has announced that it will infuse Rs 1 lakh crore, in addition to regular auctions, through ‘additional variable rate repo operations’ during March 2018, inflationary expectations and possible rate hikes by the central bank would tend to dominate market sentiments in FY19, CARE Ratings said. The volatility in the banking sector may surge further since demand for funds among companies to pay advance tax will increase heavily straining liquidity scenario in the long term, CARE Ratings said further. However, RBI’s latest liquidity infusion may lessen liquidity shortfalls in the short-run, CARE Ratings said. RBI’s latest announcement would help curtail market volatility and stabilize bond yields as well, the report said. Still, banking sector may remain under pressure in terms of volatility for many more days especially due to these two reasons:
Corporation tax collection
As the companies will be required to pay advance tax payments by 15 March 2018, the demand for funds will increase which in turn will put pressure on banking sector’s liquidity. Till January this year, out of the estimated Rs 5.63 lakh crore, 69 percent has been collected. The remaining amount has to be collected in February-March 2018. This can put a major strain on the liquidity scenario of the banking sector.
Out of the notified amount of Rs 6.23 lakh crore, government has till now borrowed Rs 5.86 lakh crore. In case of the central government borrowing the remaining amount from the markets at the month end, liquidity situation will be impacted.
The liquidity in the country has declined post demonetisation as households started shifting their financial savings from banks to assets such as mutual funds, report said. Also, a surge in credit has put immense pressure on the liquidity situation in the country.