Banking System Experiences 5-Year High Liquidity Deficit Due To Tax Outflows
The liquidity shortfall in the banking system reached a five-year peak on 22 November due to substantial outflows related to goods and services tax (GST) payments and weekly bond auctions, experts noted. According to data from the Reserve Bank of India (RBI), the liquidity deficit stood at around Rs 1.74 lakh crore, marking a significant increase from the Rs 1.05 lakh crore deficit the previous day.
“Frictional liquidity is oscillating from small surplus to a deficit of as high as Rs 2 lakh crore during the month due to tax outflows around the 21st of every month,” stated V Ramachandra Reddy, DGM - Head Treasury at The Karur Vysya Bank. A data indicated that this liquidity deficit is the highest since December 2018.
A report from Kotak Mahindra Bank projected outflows of Rs 1.5 lakh crore due to GST and Rs 65,000 crore from auctions. Over recent months, liquidity has been tight, particularly after the RBI introduced Incremental Cash Reserve Ratio (I-CRR), withdrawing around Rs 1 lakh crore from the system. Before this, liquidity had remained in surplus, prompting the central bank to implement measures to reduce it. However, these temporary measures were not effective, leading to the introduction of I-CRR.
According to a Kotak Mahindra Bank report, expected outflows for the week of 18-24 November are Rs 2.06 lakh crore, with inflows at Rs 1.6 lakh crore. Inflows include coupon inflows of Rs 13,900 crore and government spending of Rs 50,000 crore. The report also noted that the liquidity deficit is likely to ease due to inflows from bond redemptions and month-end government spending. RBI data indicates that bonds worth Rs 56,572.719 crore are expected to mature on 25 November, with an additional Rs 32,500 crore on 29 November.
Reddy commented that the RBI complemented rate hikes by tightening liquidity through various tools, transitioning from an ultra-surplus to a deficit situation post-Covid, aiming to control inflation while safeguarding growth.
