The Reserve Bank of India (RBI) injected Rs 72,860.7 crore of liquidity into the banking system on October 21 — the highest since April 2019 — after liquidity condition tightened on higher demand for credit during the festival season and the central bank’s intervention in the foreign exchange market to curb volatility in the rupee. On April 30, 2019, the net infusion of liquidity by the RBI was Rs 96,150 crore.
On October 24, 2022, the RBI again injected Rs 62,835.7 crore of liquidity into the system. Last month, the liquidity condition turned into a deficit mode on September 20 for the first time since May 2019, and the RBI had to inject Rs 21,873.4 crore into the system. Liquidity in the banking system refers to readily available cash that banks need to meet short-term business and financial needs. On a given day, if the banking system is a net borrower from the RBI under Liquidity Adjustment Facility (LAF), the system liquidity is said to be in deficit. If the banking system is a net lender to the RBI, the liquidity is said to be in surplus. The LAF refers to the RBI’s operations through which it injects or absorbs liquidity into or from the banking system.
“Liquidity condition has tightened due to the RBI intervention in the forex market. Through intervention, the RBI sells dollars and sucks out rupee liquidity from the system. Also, seasonal demand for credit has gone up, which has resulted in less cash surplus with banks,” said a banker.
So far in 2022, the rupee has depreciated by over 11 per cent. Between September 1 and October 25, the domestic currency has seen a sharp decline of 4.2 per cent and, it fell below the 83-mark for the first time on October 19. The RBI has been using the country’s foreign exchange reserves to stem the rupee’s fall. From a record high of $642.5 billion on September 3, 2021, reserves have fallen to $528.3 billion on October 8, 2022, the latest RBI data showed.
Since April 2022, the reserves have depleted by $78 billion. RBI, however, has said that two-thirds of the fall in forex reserves in the current fiscal is due to valuation changes arising from an appreciating US dollar and higher US bond yields. Bank credit hit a decade high after it rose by 17.9 per cent in the fortnight that ended October 7. In absolute terms, credit outstanding stood at Rs 128.6 lakh crore as on October 7, rising by Rs 19.56 lakh crore over the last 12 months, according to the latest RBI data. The rise in the same period of last year was Rs 6.71 lakh crore.
The growth was driven by retail credit, higher working capital demand amidst high inflation, and lower funds raised in the capital market, Care Ratings said in a report. The rise in advances is expected to remain elevated in the short term due to the ongoing festival season, it said. “Rise in demand for credit during festivals leads to higher growth in credit than in deposits. If credit is higher than deposits, then automatically there is a liquidity issue,” Bank of Baroda’s chief economist Madan Sabnavis said. He said whenever there is a liquidity shortage in the system, RBI injects liquidity by buying back government securities (g-sec) through open market operations (OMO).
“It is not a formalised kind of G-SAP (G-sec acquisition programme) where securities are bought through open market operations. On any particular day, when the RBI sees a liquidity problem, it does buy securities, but the purchases get reported later,” he said. Open market operations (OMO) means buying and selling of government securities in the open market in order to expand or contract the amount of money in the banking system. Purchases inject money into the banking system and stimulate growth while sales of securities do the opposite. Some experts believe that this liquidity infusion by the RBI on October 21 was on behalf of the government, which has started its spending.
“The government was to start spending from the beginning of October, but it got delayed. On October 21, the government would have released some amount for welfare and developmental activities,” a banker said.
The government is likely to spend around Rs 3-4 lakh crore in developmental activities before the next budget, he said.
