Durable liquidity still significant amid forex interventions, rising cash demand: Report

New Delhi, Oct 24 (IANS) The system liquidity has tightened sharply towards a zero position, driven by elevated Government of India (GoI) balances, RBI foreign exchange operations, and rising cash demand ahead of the festive season, a report showed on Saturday.

According to the report by Axis Bank’s Economic Research team, analysing the latest shifts in India’s banking system liquidity and funding conditions, liquidity has tightened markedly towards a zero position, with overnight rates up and management turning back to Variable Rate Repo (VRR).

“A chunk of this is largely on the swelling of GOI balances – these tend to fall in early December for a few days. However, this is likely to be offset by increased demand for currency notes around the festival season, as well as ongoing FX intervention,” said the report.

These drains translate directly to deposits, meaning that the wedge between deposit and credit growth is likely to reopen ahead. Along with this, bank funding conditions are likely to worsen further, over and above any rate recalibration in play, the report suggested.

This tightening is on account of drains through RBI forex operations and demand for currency notes leading durable liquidity to 3.2 per cent of Net Demand and Time Liabilities (NDTL), though tightness in actual liquidity owes to elevated GOI balances.

“Going by seasonal patterns, this reverses for a time in early December, creating a window of easy liquidity,” the report mentioned.

However, demand for currency notes in the festival season, coupled with retention of withdrawn notes, will likely keep liquidity low.

With fading liquidity, deposit growth is likely to come back below credit growth.

“Drains to liquidity are largely related to deposits, except for OMO sales where sellers are largely banks. This is also true for tax payments. With liquidity coming back towards normal, it, therefore, necessarily means that deposit growth will also cool off,” explained the report.

In practice, this will manifest as a once-again wider gap with credit growth, along with associated funding issues. Increases in market interest rates have already been widely noted, with increase also driven by forwards amid excess USD around IPOs, new RBI restrictions, and an inversion of CIP, it added.

—IANS

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