Despite better liquidity, public sector banks borrow from market

The liquidity is running at a surplus mode now, with the banking system parking more than Rs 1 trillion with RBI

Public sector banks (PSBs) saw respite in their liquidity profile but continued to borrowing from the markets in the past few months.

According to data from India Ratings, in March, 14 PSBs had raised Rs 97,600 crore issuing certificates of deposit (CDs), as liquidity tightened. In June, CDs issued by PSBs amounted to Rs 54,700 crore. Before March, these banks had raised lesser from the markets, as credit growth remained muted.

In the private sector, 13 banks had issued Rs 83,000 crore in March, and in June, the CD issuance by 10 private banks have been Rs 26,400 crore.  

“The increasing share of PSU banks in primary CD market explained rising credit offtake by them, coupled with muted deposit growth,” said Soumyajit Niyogi, associate director of India Ratings. 

However, the situation seems to have started easing, owing to improvement in system liquidity and slowed down in demand for credit. 

“This could enable better rate transmission,” Niyogi said.

The liquidity is running at a surplus mode now, with the banking system parking more than Rs 1 trillion with the Reserve Bank of India (RBI).

The central bank is also engaged in revising its liquidity framework. In the earlier framework, the key gauge was overnight call money rate to remain anchored around the policy rate. The revised framework, however, will better reflect durable liquidity for a desired growth and inflation path. 

According to Indranil Sengupta, chief economist of Bank of America Merrill Lynch, the durable liquidity requirement in fiscal year 2019-20 (FY20) could be as much as $35 billion.

“We expect the RBI to institutionalise a pro-active response to switches in foreign exchange flows with open market operations (OMO for bond purchases), as already the case since December. Our liquidity model estimates that the RBI will likely have to OMO $18 billion ($7.5 billion done so far) in FY20,” Sengupta said.