As the incoming government prepares to assume office, banks are expecting relief from the tight liquidity conditions that have prevailed in recent times. Last month, the banking system faced significant liquidity deficits due to reduced government spending and outflows linked to the goods and services tax.
To alleviate the strain on cash-starved banks, the Reserve Bank of India (RBI) injected nearly Rs 9 lakh crore into the banking system through 11 Variable Rate Repo (VRR) auctions in May, marking the highest infusion in the current calendar year.
Government spending had been constrained by the model code of conduct imposed during the general elections. However, with the elections concluded, expectations are high for increased government spending once the new government takes charge. This surge in spending is anticipated to commence from the second week of the month.
Liquidity deficit
The shortage of funds experienced by banks was attributed to the rise in cash circulation during the elections, primarily due to political parties’ spending. However, with the elections concluded, it is anticipated that cash circulation will decrease, with funds returning to the banking system.
Previously, the banking system encountered a cash squeeze in February, prompting the central bank to conduct seven VRRs and infuse Rs 7.5 lakh crore into the banking system. April saw some relief as liquidity occasionally turned surplus, providing respite to the banks.
Repo auctions, conducted by the central bank, are instrumental in injecting liquidity into the system.
