Banks’ borrowing from the Reserve Bank of India’s (RBI) Marginal Standing Facility (MSF) rose sharply in November, reflecting the tight liquidity situation in the banking system. Lenders borrowed Rs 1.5 trillion on November 20, the highest amount borrowed so far in this month, according to the RBI’ latest data.
Tightening in liquidity was earlier visible in the last week of the previous month when banks’ borrowing through MSF had reached Rs 1.86 trillion on October.
Banks turn to RBI’s MSF facility for overnight funds when the interbank liquidity dries up. Currently, the MSF rate is 6.75% which is 25 basis points higher than the repo rate.
Borrowing through MSF remained in the Rs 45000 to Rs 74000 crore in the first week of this month but the strain on liquidity increased as the month progressed. In the second and third week, the borrowing hovered around Rs 1 trillion mark.
Responding to the tight liquidity in the system, the central bank injected Rs 1.5 trillion through Liquidity Adjustment Facility (LAF) operations. The infusion of liquidity by the RBI has also increased in November. The central bank injected nearly Rs 21,000 crore on October 7 which increased to Rs 44,000 crore – Rs 54,000 crore in the third week of this month.
“Tight liquidity is on the expected lines because of the festive season and high credit demand. Banks usually see high withdrawals of cash by customers for their festival related spending,” a senior bank official told FE.
RBI has made it clear that it is not comfortable with the excess liquidity in the system as it comes in its way to control inflation. It imposed 10% ICRR (incremental cash reserve ratio) on banks in August to absorb excess liquidity following the withdrawal of Rs 2,000 notes. However, it announced phased withdrawal of ICRR from September 23.
The central bank has even said it could consider conducting Open Market Operations to suck out excess liquidity. However tight liquidity conditions will delay the possibility OMOs by the central bank.