Banking system liquidity falls to over 3-week low as credit growth picks up

Liquidity surplus narrowed to ₹2,884 crore as credit growth outpaced deposits, though FCNR(B) inflows are expected to improve system liquidity in the coming weeks

The liquidity in the banking system fell to the lowest level in more than three weeks on the back of a pick-up in credit growth, the latest data from the Reserve Bank of India (RBI) showed.

 

The net liquidity surplus stood at ₹2,884 crore on Wednesday, the lowest since June 29, when the system was in a deficit of ₹13,077 crore, RBI data showed.

 

"Liquidity is falling basically because of higher credit growth as compared to deposit growth, coupled with likely RBI intervention in the foreign exchange market to manage volatility. The actual extent of that will only become clear tomorrow (Friday) when we get the RBI's current reserve position," said Madan Sabnavis, chief economist at Bank of Baroda.

 

Market participants said liquidity is expected to improve in the coming weeks once dollar inflows under the FCNR(B) window are converted into rupees.

 

"The government continues to sit on a large cash surplus, which is another factor keeping liquidity tight, though I'd call that a coincidental rather than a leading factor. The government may also slow its spending given the current uncertainty. That said, liquidity should improve once the FCNR(B) inflows come through and those dollars are converted into rupees, which automatically releases liquidity into the system. If close to $20 billion eventually gets converted, it should meaningfully ease the current tightness," said the treasury head at a private bank.

 

RBI data showed total inflows of $20.72 billion through July 17. Of that, FCNR(B) deposits accounted for $17.4 billion, while overseas foreign currency borrowings contributed $1.97 billion and external commercial borrowings (ECBs) under the swap facility brought in $1.34 billion.