With the Reserve Bank (RBI) drying up excess liquidity, banks have increased their borrowings from the Marginal Standing Facility (MSF), showing that banks are facing liquidity stress.
Banks borrowed Rs 3.2 trillion in the first week of October compared to Rs11,330 crore in the first week of August and Rs 22,056 crore in the first week of September, according to RBI data.
Similarly, banks borrowed Rs 3.32 trillion in the second week of October compared to Rs 88,714 crore in the second week of August and Rs 2.49 trillion in second week of September.
When the interbank liquidity dries up, banks turn to RBI’s MSF facility to get overnight funds. Rising borrowings from MSF indicate increase in liquidity stress in the system. Currently, MSF rate is 6.75% which is 25 basis points higher than the repo rate.
Despite phased withdrawal ICRR (Incremental Cash Reserve Ratio), liquidity is tight in the system due to tax related outflows in the last month, say experts.
“Last month, we saw outflows related to advance tax and GST payments. At the same time, government has done spending but not entirely to the extent they have absorbed the tax collections,” Upasna Bhardwaj, chief economist, Kotak Mahindra Bank, told FE.
“Also, there has been forex intervention by the RBI to stem the rupee weakness which is further tightening the liquidity situation. With government cash balances being very high, the tight liquidity situation is persisting and keeping overnight rates elevated near MSF rates,” she added.
RBI data shows that banks’ borrowing through MSF was relatively lower in August and gained pace in September and October, reflecting liquidity tightening in the banking system. 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 on banks in August to absorb excess liquidity following the withdrawal of Rs 2000 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.
Experts say that only some banks are borrowing from MSF window and they are most mid and small-size banks.
“If some banks are continuously borrowing from MSF, it means they are facing liquidity stress. There are certain large banks that have surplus liquidity and they are parking it in SDF (Standing Deposit Facility) while there are certain banks that are perennially facing liquidity shortage and are opting for MSF borrowing,” Madan Sabnavis, Chief Economist, Bank of Baroda told FE. “The liquidity is expected to remain tight in the near term because credit growth remains strong and deposits are not growing fast enough. This situation will continue where some banks will have surplus liquidity while some will face liquidity shortage,” he added.