Higher Tax Outflows, Currency Leakages To Put Pressure On Liquidity Deficit By Mar-end: Report

A recent report by the Bank of Baroda (BoB) has said that higher tax outflows as well as currency leakages ahead of the elections, can put some pressure on the liquidity deficit towards the end of March 2024. 

In its 'Understanding the Liquidity Deficit' report, the bank stated that the liquidity situation in the coming days is likely to be influenced by several factors such as momentum in credit, deposit growth as well as government’s year-end fiscal program.

The bank in the report added, "We believe that a combination of pickup in deposit growth, along with higher spending by the government will ease the liquidity pressure to a large extent." Adding to this, the maturity of USD 5 billion swaps is due on 11 March 2024, which is likely to add Rs 40,000 additional liquidity to the system.

Notably, the liquidity deficit in the system has been increasing since September 2023, to reach a record high of Rs 3.5 lakh crore on 24 Jan 2024. A key factor which has been impacting the banking system liquidity is the uneven growth in credit and deposits. 

While credit growth has been growing at a robust pace, deposit growth has been lagging in relative terms. Apart from this, government spending was heavily curtailed in Q3FY24. The deficit was further exacerbated by quarter-end GST and tax outflows. 

However, the situation is expected to stabilise in the coming days as government spending picks up. This has also been seen in March when the system turned into a surplus. "Deposit growth too has been inching up which should further ease liquidity pressure," it stated.

 Outlook for March 2024:

 The key factors to watch are growth in credit, deposits and investments. Investment growth is assumed to remain at current levels since the central government borrowing program is over for the current financial year. 

However, banks will continue to participate in the SDL auctions. Apart from this, there might be some portfolio balancing undertaken by banks towards the end of the financial year. 

"We are assuming a 10 per cent growth in investments for FY24," the BoB added in the report.