Despite open market operation (OMO) purchases worth Rs 35,000 crore made by the Reserve Bank of India (RBI) this month out of the planned Rs 50,000 crore, the liquidity deficit in the banking system widened during the week ended December 21, which marked the 11th consecutive week to see the banking system face an overall liquidity crunch. According to analysts, the average liquidity deficit has almost doubled from Rs 84,737 crore during the week ended December 14 to Rs 1.49 lakh crore during the week ended December 21. The yield on the benchmark bond ended at a 34-week low of 7.26% on Wednesday, 3 basis points (bps) lower than the previous close of 7.29% on Monday, led by a fall in crude prices and liquidity infusion by the central bank of an additional Rs 10,000 crore through OMOs this month.
The liquidity deficit on December 20 was at a multi-year high. The total repo borrowings on December 21 scaled an 11-week high of Rs 1.81 lakh crore, according to a report by Care Ratings. There were no reverse repo transactions undertaken during the week. “The high liquidity deficit can primarily be attributed to the increase in currency circulation, fuelled by the wedding season, festive and year-end demand, coupled with the liquidity constraints faced by the NBFC (non-banking financial companies) sector and bank credit growth exceeding bank deposit growth,” said experts at CARE ratings.
The NBFC sector has been resorting to higher bank borrowings in recent months. Credit off-take during April-October to this sector increased 13.3% year-on-year (y-o-y), against a contraction of 7.6% y-o-y in the same period last year. The increased demand for funds by NBFCs through banks has been a reason for lower corporate bond issuances and also weighs on the liquidity of the banking system. The growth in non-food bank credit rose by 15.07% year-on-year (y-o-y) during the fortnight ended December 7 from 14.92% in the previous fortnight. On the other hand, deposit growth over the past many months has been growing slowly; deposits with the banking system grew 9.66% y-o-y to Rs 118.84 lakh crore as on December 7.
As a consequence, banks have been raising both deposit rates and loan rates. The RBI’s liquidity adjustment facility (LAF) on Wednesday saw transactions for Rs 22,786 crore, followed by Rs 20,903 crore at the start of the week on Monday, December 24. Barring the weeks ended October 8 and December 3, liquidity in the banking system liquidity has been in deficit mode every week since September 11.