India's banking liquidity crunch seen as temporary, says analyst

The fall in India's banking system liquidity surplus is expected to ease over the coming days, as government spending and bond redemptions offset the impact of recent tax outflows, analysts said on Monday.

The liquidity surplus declined to 70 billion rupees ($794 million) on September 21, the lowest since late March, after nearly 2.6 trillion rupees moved out due to income tax and goods and services tax payments. The amount of money in the banking system influences market interest rates, including those on consumer loans.

"We expect this shortage to be temporary, as a pickup in government spending should help neutralise its impact over the coming week," said Vivek Kumar, an economist with Quanteco Research, adding that bond redemptions will also help.

The Reserve Bank of India is comfortable with a liquidity surplus of around 1% of banks' deposits, which is roughly 2.5 trillion rupees. The liquidity surplus had averaged above that level in recent weeks before the tax-related outflows.

Gaura Sen Gupta, chief economist at IDFC First Bank, says that liquidity is expected to rise over the next few weeks into October, as government expenditure picks up and a lowering of banks' cash reserve ratio comes into effect.

The ratio, the quantum of funds banks must park with the RBI, is set to be lowered by a total of 100 basis points in four equal tranches during September-November. The next cut will take effect on October 4.

Quanteco's Kumar expects liquidity surplus to revert to 2 trillion rupees to 2.5 trillion rupees even before that.

Banks also appear confident, borrowing only a fraction of the funds available at the RBI's repo window.