Mumbai: Deficit liquidity, as measured by bank borrowings from the Reserve Bank of India (RBI), has widened to the highest level in four months as tax outflows and constraints on government spending amid elections have left lenders with a cash crunch, pushing up overnight borrowing costs.
The latest RBI data showed that as of May 21, net liquidity injected into the banking system was at ₹2.55 lakh crore, the highest since January 30. Fund injections by the RBI reflect banks’ borrowings from the central bank’s liquidity windows.
The shortfall of funds has pushed up the weighted average call rate (WACR), which represents banks’ overnight cost of borrowing and functions as a determinant of other borrowing costs in the economy too. On Wednesday, the WACR closed at 6.75%, the same rate as the RBI’s Marginal Standing Facility (MSF).
The MSF rate, which is the penal rate at which banks can borrow funds on an overnight basis from the RBI, is 25 basis points higher than the benchmark policy repo rate.
While the RBI’s actions in the foreign exchange markets over the past couple of months and continuing strong demand for bank credit have contributed to tightening liquidity, the key driver of the fund shortfall has been the slowdown in government spending as such expenditure flows through the banking system.
“The bigger drag has been the build-up of government cash balance, which should be around ₹3.5 lakh crore right now after GST and this will increase further after the RBI dividend. The government has been trying to offload some of this excess cash by way of buybacks and T-bill reductions, although there has been limited success,” said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.
Over the past few weeks, the government has attempted to utilise the large build-up in cash balances to repurchase some of its outstanding bonds, ease repayment obligations, and inject immediate liquidity into the banking system. “Going by the current condition, we do not expect anything to improve in a meaningful way in the coming month unless and until the government spending starts normalising along with the RBI dividend transfer to the government,” said Soumyajit Niyogi, director at India Ratings & Research.
However, the RBI has rejected a bulk of banks’ bids at buyback auctions, as lenders have offered to sell bonds back at prices that may be too high for the central bank’s and the government’s liking.
