Indias banking system has remained plagued by a major funding shortage that has led the Reserve Bank of India (RBI) to contemplate injecting as much as INR 1,00,000 crore by the end of March. A recent report by the State Bank of India (SBI) shows that liquidity conditions have remained tense and that there is a systemic deficit of INR 1.6 lakh crore as of February. The average deficit is even worse, standing at around INR 1.95 lakh crore.
The present liquidity position has deteriorated considerably compared to the previous few months. In November 2023, the system had a surplus of INR 1.35 lakh crore which translated into a deficit of INR 65,000 crore in December. This gap further widened to INR 2.07 lakh crore in January 2024 and INR 1.59 lakh crore in February. The liquidity has been stated to have tightened due to large foreign portfolio investor (FPI) outflows and the maturity of forward transactions.
It is expected that year-end tax outflows in conjunction with increasing credit demand will maintain pressure on liquidity. In response, the RBI has put in place a number of measures, including Variable Rate Repo (VRR) auctions, Open Market Operations (OMOs) and Dollar Rupee swaps. The central bank has since January 16, 2019 been holding daily VRR auctions to address short term liquidity problems.
However, the SBI report points out that liquidity still remains constrained. The RBI has already conducted OMOs of worth INR 1.38 lakh crore and Qtr End VRR auctions of INR 1.8 lakh crore in April. If liquidity conditions do not improve, the central bank may have to do more to stabilize the banking system and to restore financial equilibrium.
