Liquidity deficit for week ended Feb 22 at nearly two-month high

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Published: February 26, 2019 2:25:00 AM

The average liquidity deficit for the week ended on February 15 remained at a seven-month high of Rs 86,715 crore, which was 32% lower than the deficit for the week ended February 22.

The bank credit growth as on February 1 remained higher year-on-year (y-o-y) at 14.5%, while the deposit growth was recorded at 9.6% for the same period. (Representational photo)

The average liquidity deficit in the Indian banking system for the week ended February 22 was at an eight-week high of Rs 1.3 lakh crore. The liquidity deficit tightened on the back of tax outflows, coupled with the likely Reserve Bank of India
(RBI) intervention in the forex markets by way of dollar sales to stem the depreciation in the rupee, according to a Care Ratings report.

Despite the OMO (open market operations) purchases worth Rs 25,000 crore by the RBI in two tranches during February, the liquidity deficit widened during the week. The RBI had announced the result of the first tranche of auctions on February 14, and second tranche results were announced on February 21.

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The average liquidity deficit for the week ended on February 15 remained at a seven-month high of Rs 86,715 crore, which was 32% lower than the deficit for the week ended February 22.

The bank credit growth as on February 1 remained higher year-on-year (y-o-y) at 14.5%, while the deposit growth was recorded at 9.6% for the same period. “The lower growth in deposits amid a stronger credit growth has been a factor contributing to the liquidity constrains in the banking system,” said the experts at Care Ratings.

The yield on the benchmark bond maturing in 2028 rose by 14.5 bps since January 1, 2019 to close at 7.584% on Monday, February 25.

Foreign portfolio investors (FPI) have pulled out nearly $741 million from the bond markets since January 1, 2019.
“The cost of hedging the currency risk has gone up to 8% from 6% annualised. The cost of funds of investing in India has gone up substantially, which is preventing people from getting in fresh money, and also some people might be pulling out money,” said Sandeep Bagla of Trust Group.

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The banking sector was in deficit for the 20th consecutive week, despite the two tranches of liquidity infusion by the RBI through OMO purchases worth Rs 25,000 crore, out of the planned Rs 37,500 crore during February. The RBI is expected to announce the third and final tranche of OMO purchase worth Rs 12,500 crore during this week.

“Statutory outflows, government market borrowings, scheduled reporting of banks with the RBI and month-end demand by importers for making foreign exchange payments would pressure banking system liquidity for the week ending March 1,” said experts at Care Ratings.

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