Trade gap, FPI outflows push banking liquidity into deficit after 2 months

The banking system liquidity fell into deficit mode on Tuesday after two months due to a negative balance of payments (BoP) in the third quarter of the current financial year (Q3FY25), a widening trade deficit, and increased foreign portfolio investors’ (FPIs) outflows since October.

 

The liquidity in the banking system stood at a deficit of Rs 6,956 crore on Monday, according to the latest data from the Reserve Bank of India (RBI).

 

“The reduction in system liquidity surplus is led by the balance of payments turning negative in Q3FY25, with a rising trade deficit and an increase in FPI outflows since October. As a result, the RBI has supplied dollars (and bought INR) in Q3FY25,” said Gaura Sen Gupta, chief economist at IDFC First Bank. “This is also reflected in core liquidity surplus (system liquidity plus government surplus) reducing from peak levels of Rs 4.6 trillion as of September 27 to Rs 1.6 trillion surplus as of November 15. The reduction in core liquidity indicates that system liquidity tightness could persist if BoP outflows continue. That said, we expect BoP to be in surplus in Q4FY25 with a seasonal reduction in the trade deficit and hopefully FPI flows turning positive once again,” she added.

 

 

A key factor supporting system liquidity has been the increase in government expenditure, said experts.

 

They said this is evident from the government's cash balance turning negative to Rs -0.4 trillion as of November 15, compared to a peak surplus of Rs 5.1 trillion on May 24 of the current year.

 

However, some experts said that GST outflows might have further weighed on liquidity and that it should bounce back within a week.

 

“It is a combination of GST outflows, and there might have been a slowdown in government spending. We don’t have the latest data to confirm that. But it should be corrected within a week or so,” said Madan Sabnavis, chief economist at Bank of Baroda.