The liquidity crunch in the banking system is exerting pressure on the credit growth, with bankers and economists divided on whether further tightening will lead to tapering in loan growth.
The system liquidity, which was in surplus earlier, has dried up but liquidity coverage ratio (LCR) of the banking system is around 130-135%, said Suresh Khatanhar, DMD of IDBI Bank.
“Secondly, banks have increased their deposit rates, so mobilisation has improved. I do not think liquidity will have an impact as rates will correct by themselves and address the credit growth requirement,” he added.
In FY24, the deficit in demand and supply of funds is expected to come around Rs 2.3 trillion, an improvement compared with a deficit of Rs 4 trillion in FY23, as per economists at Bank of Baroda.
The Reserve Bank of India (RBI) has infused Rs 4.1 trillion in the banking system between February 8 and February 22, as per central bank data.
Additionally, the RBI also conducted 14-day variable rate reverse repo auction on February 24, which led to spike in call rates to 6.80%. Though this has taken the market by surprise, it is not known whether this is permanent liquidity tightening or the RBI is anticipating flows into the system.
Until there is improvement in liquidity on a sustained basis, there will be pressure on call rates and rates in the money market, experts said.
“However, we should not read too much into it,” said Abheek Barua, Chief Economist at HDFC Bank. As surplus in liquidity has waned, the pressure to increase both liabilities and credit rates has built up and the RBI is perhaps using this as a tool to increase the intensity of transmission,” he added.
On the other hand, Soumyajit Niyogi, Director, India Ratings & Research, said banks may be delaying new sanctions or rejecting higher enhancement limit. The major impact of the liquidity squeeze will be felt by small or weaker borrowers, he said.
“The disbursement data from the RBI shows incremental credit growth but we are not able to gauge whether loan rejection has increased or not,” Niyogi commented.
The tight liquidity conditions have also put pressure on yields of treasury bills (T-Bills), which are shorter duration government borrowings. The yield on 91-day T-Bill has increased 40 basis points (bps) to 6.82%, 182-day T-Bill has increased 36 bps to 7.18% and that on 365-day T-Bill has increased 35 basis points (bps) to 7.26% as of February 24, closer to the 10-year government securities paper yield, which closed at 7.39%.
Further, a significant amount of long-term repo operations (LTRO) and targeted long term repo operations (TLTRO) are maturing in March and April which will put additional strain on liquidity.