Liquidity surplus crosses Rs 1.75 trillion-mark on higher govt spending

Liquidity surplus in the banking system zoomed past Rs 1.75 trillion on the last day of May on the back of higher government spending, latest data released by Reserve Bank of India showed.

On Wednesday, the surplus liquidity in the banking system was around Rs 1.76 trillion, while it was approximately Rs 1.35 trillion on Tuesday. The surplus was over Rs 1 trillion in the past few days.

“The improvement in liquidity conditions by May 31 is likely due to the pick-up in government expenditure, which is the usual pattern given that salary payments, etc. usually take place at month-end. Other factors that have helped ease liquidity pressures in May are reduction in currency leakage with currency in circulation falling by Rs 13,300 crore (May 26 over April 28),” said Gaura Sengupta, India economist, IDFC First Bank.

The surplus liquidity in the system has cooled off the overnight rates, which dropped to 6.15 per cent on Thursday. According to the Clearing Corporation of India data, the weighted average call rate was 6.32 per cent on Thursday as compared to 6.33 per cent in the previous day.

The other reason for the rise in the surplus liquidity could be intervention by the central bank in the foreign exchange market, mainly during the first fortnight of May.

In the recent weeks, the RBI has been buying foreign currencies infusing rupee liquidity, which was also reflected by the rise in the foreign exchange reserves. After rising for two consecutive weeks, foreign exchange declined for the week ended May 19.

The central bank’s decision to withdraw the Rs 2,000 note from the banking system is also expected to have some impact on the system liquidity. The process to withdraw the Rs 2,000 note started from May 23.

Earlier this week, State Bank of India Chairman Dinesh Khara said around Rs 17,000 crore worth Rs 2,000 notes were deposited and exchanged by the bank since the withdrawal process started.

“About Rs 14,000 crore has been deposited in accounts and Rs 3,000 crore exchanged,” Khara said in Ahmedabad on Monday. SBI has a market share of 20 per cent.

The Rs 2,000 note was introduced in 2016 after the legal tender status was withdrawn for the then Rs 500 notes and Rs 1,000 notes during the demonetization exercise.

On May 29, the RBI announced to withdraw the Rs 2,000 note from circulation citing clean note policy and lack of use. The withdrawal that started from May 23 will continue till September 30. The Rs 2,000 note continues to be a legal tender.

Sengupta said liquidity conditions were likely to improve, going ahead.

“We expect liquidity conditions to improve with the government cash surplus improving to Rs 1.3 trillion by May 26 from the temporary deficit in April. Government cash surplus is expected to rise by the end of May post the credit of the RBI dividend, which will support government expenditure in June.  The Rs 2,000 note withdrawal is also expected to provide a transient liquidity boost till September by reducing currency leakage as individuals deposit a part of the notes,” Sengupta said.