The banking system’s liquidity deficit is expected to narrow by a big margin as around R75,000 crore of inflow is expected either through government expenditure or auction of the surplus cash balance of the Centre with the Reserve Bank of India.
According to RBI data, the cash balance of the government as of April 7 was R75,457 crore and this has already come down to R61,653 crore as of April 9, indicating government expenditure.
The central bank has began making the government cash balances with it public from this month onwards. This was a long-standing appeal from market participants as it helps them get a clear outlook on liquidity.
Another sign of easing liquidity pressure has been the fall in overnight rates and also a rise in daily reserve repo auction subscriptions. The weighted average call money rate has eased to 7.6% now from as high as 11% on March 31. Banks’ outstanding deposits with the RBI at its various reverse repo tender was R60,463 crore compared with R32,000 crore deposited on March 31.
Bank treasurers said that much of this easing is seasonal as government expenditure flows in at the beginning of every financial year.
Also, as loan offtake is sluggish during the first month of the year, banks are flush with funds. “The easing is largely a seasonal factor which we see during every financial year,” said KN Reghunathan, head of treasury, Union Bank of India.
YES Bank estimates the deficit would reduce to nearly half of R1.1 lakh crore that was seen end-March. “Tactical reserve management strategy and a pick-up in government spending at the start of the year are likely to improve liquidity and aid in transmission of past monetary actions,” said Shubhada Rao, chief economist, YES Bank.
The fluctuations in liquidity of the banking system largely stem from movement of the government cash balances besides banks’ last-minute rush to build balance sheets during the month of March of every year.
Tax revenues and one-off revenues from auctions drive up the government’s balances with the RBI, while various expenditures channel the money into the banking system. Since December 2014, the RBI has been auctioning cash balances of the government that it holds in order to smoothen the sharp fluctuations in systemic liquidity.