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Too much money, very few takers; liquidity no issue in economy

In the week ending May 29, 2020, the banking system liquidity is expected to remain in a surplus position with the growth in the bank deposits and contraction in the bank credit off take

twitter-logoNiti Kiran | May 27, 2020 | Updated 20:38 IST
Too much money, very few takers; liquidity no issue in economy
In addition, the liquidity has been aided by deposit growth surpassing credit off take persistently

Banks are flush with funds as liquidity in the banking system continued to stay in surplus last week with outstanding liquidity (surplus) well above Rs 4.5 lakh crore through out the week ended May 22.

As a result, banks parked Rs 7.29 lakh crore of unutilised funds with the Reserve Bank of India under the reverse repo window. Banks currently borrow from RBI at 4 per cent while they earn only 3.35 per cent while parking the funds with the banking regulator, a loss of 0.65 per cent. However, with economic activity coming to a standstill, businesses are borrowing less while banks themselves are extremely wary of lending to risky borrowers.

During the week, though, the amount declined marginally from Rs 7.81 lakh crore as on May 15, 2020, to Rs 7.30 lakh crore, last week . "With sustained liquidity surplus for the week ending May 22, 2020, the RBI has undertaken term (fixed rate) reverse repo auctions in order to allow banks to park any excess funds with the RBI," according to a CARE Ratings report.

This week (ending May 29, 2020), the banking system liquidity is expected to remain in a surplus position with the growth in the bank deposits and contraction in the bank credit off take. Expected pick up in the borrowings by the central as well as state governments may lower the liquidity surplus in the coming weeks, it added.

Liquidity infusion measures undertaken by the RBI in the aftermath of coronavirus crisis such as reduction in repo rate by 40 basis points to 4 per cent, four auctions of targeted long term repo operations (TLTRO 1.0) aggregating a little over Rs 1 lakh crore, one auction of TLTRO 2.0 aggregating Rs 12,850 crore, cut in CRR, reduction in maintenance of daily CRR balance, unannounced OMO purchase auction of Rs 1.3 lakh crore since the beginning of April to provide ample liquidity have resulted in the liquidity surplus in the banking system, the report said.

Also read: Will microfinance survive coronavirus crisis? A lot depends on how funds flow to borrowers

In order to provide liquidity support to mutual funds, the RBI announced special liquidity facility (with outstanding Rs 2,430 crore as on May 22), which further supported liquidity in the system. In addition, the liquidity has been aided by deposit growth surpassing credit off take persistently.

"The incremental growth in bank deposit was 2.1 per cent compared to incremental bank credit contraction by 1.1 per cent as on May 8, 2020. Redemption of SDL securities worth Rs 4,607.5 crore might have further added to the existing liquidity. However, increase in borrowings by the central government (Rs 30,000 crore), state government borrowings (Rs 8,000 crore) and month end statutory tax payments could have partially limited the liquidity surplus during the week," it added.

Also read: RBI moratorium on EMIs: How much extra do you have to pay for credit card dues?

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