Liquidity dries on govt parsimony, RBI intervenes

The liquidity in the banking system has dried up, but for the central bank's active help. Data shows the government is not spending its money back into the economy fast enough, building up an unusually large cash balance. At the same time, the Reserve Bank of India (RBI) is actively intervening in the currency market, having sold about $5 billion worth in the past one month to stabilise a falling rupee, thereby removing an equivalent amount of rupee liquidity from the system.

As a result, liquidity shortage in the banking system has assumed a mammoth proportion - prompting the RBI to offer assistance of some Rs 1.6 lakh crore through its various overnight and dated liquidity windows. All with the intention that the overnight call money rates remain at around the repo rate of 6.75 per cent.

Fed with easy liquidity and having enough mortgageable government securities, banks are not complaining - a far cry from a year ago when bank short-term deposit rates used to spike up in proportion to the liquidity shortage.

On a technical basis though, the liquidity shortage is about 1.73 per cent of the net demand and time liability (NDTL) of the banking system, much higher than RBI's own target of one per cent of NDTL.

However, the overarching aim of the regulator now is to keep call money rates anchored to the repo rate.

But the RBI's balance sheet is taking a hit in the process. The government's surplus cash balance with the RBI was at Rs 1,26,765 crore as on January 22. While it is normal for banks to suffer liquidity shortage at the time of tax outflow, the money starts coming back into the system in a fortnight or so as the government starts spending. This has not happened so far, indicating that the government could be going stingy to meet its fiscal deficit target.

Government's cash balance with RBI remains at around Rs 80,000 crore on the higher side. It is quite surprising that the government is not parting with its cash even after almost one-and-a-half month of having collected its taxes," said Gaurav Kapur, senior economist with RBS India, adding, meeting fiscal deficit could be one of the reasons behind this move.

According to a public sector banker, this is not troubling the banks as the RBI is providing adequate liquidity at cheap rates. "Liquidity related problems are largely a thing of the past under the new framework. When there is not much of credit growth, liquidity is largely an RBI subject," said the banker.

While not structural, such liquidity shortage is called 'frictional'. In a scenario like this, central bank comes up with various short-term measures including bond buyout from the secondary market. Last week, the RBI conducted an open market operation and bought back Rs 10,000 crore of bonds to ease liquidity. Frictional shortage is dragging on and could come up as an important input for the RBI when it announces its monetary policy on February 2.