For seven days in September, the RBI injected funds into the banking system, indicating deficit liquidity conditions, as the combination of quarterly advance tax payments and monthly goods and services tax payments drained the system of funds.
However, as on September 26, the banking system returned to the surplus liquidity mode amid a strong pace of government spending and heavy foreign flows into Indian capital markets. On Thursday, the RBI absorbed funds worth Rs 44,337.34 crore from banks, central bank data showed, indicating excess cash with lenders. Analysts see a broader monetary policy message in the RBI’s actions, especially as the central bank has permitted surplus liquidity to prevail for around three months now, barring the short gap this month.
An injection of funds by the RBI indicates deficit liquidity conditions as banks borrow from central bank windows such as the Marginal Standing Facility to meet financing and reserve requirements. An absorption of funds by the RBI indicates surplus liquidity conditions as banks deploy excess cash at central bank windows such as the Standing Deposit Facility.
For markets, a prolonged period of surplus liquidity translates into cheaper access to capital as benchmark borrowing costs fall. From a sale on June 26 to the latest auction on September 11, yields on 91-day, 182-day and 364-day government Treasury Bills have declined 15, 20 and 26 basis points, respectively. Sovereign treasury bills are benchmarks used for pricing various types of short-term corporate debt.
“The fact that the RBI has tolerated a liquidity surplus in the system over the last three months compared to where we were in the previous quarter, is an indication of some amount of tolerance for greater liquidity and therefore some easing,” said HDFC Bank principal economist Sakshi Gupta.“I think that a change in stance is on the table for the October policy but it’s a very close call, especially given some of the niggles, or risks that are coming up with regard to the uneven progress of the monsoons,” she said.The RBI’s Monetary Policy Committee will detail its next policy statement on October 9.
From June 28 to September 16, liquidity conditions have been in surplus every day, with the daily average quantum of funds parked by banks with the RBI at Rs 1.3 lakh crore, central bank data showed. In 2023, the RBI did not permit surplus liquidity conditions to prevail for prolonged periods, taking steps to drain out excess funds from the system as it endeavoured to bring down inflation.
“Inflation is, at the moment, looking comfortable. I think more important is liquidity. I do assign a reasonable probability of a change in stance in this policy. Liquidity conditions have been ample since July, and even though their stance is ‘withdrawal of accommodation’, they (RBI) have already started accommodating,” said Kotak Mahindra Bank chief economist Upasana Bhardwaj.
Apart from gradual comfort on inflation, experts pointed to another potential reason behind the RBI’s tolerance of surplus liquidity — the wedge between bank credit and deposit growth that has persisted for two years now.
“RBI liquidity management shows rising comfort with surplus liquidity over the last few months…another factor could be to support deposit growth which has been trailing credit growth since FY23. Reserve money growth has slowed from 12.3% YoY in FY22 to 6.8% as of Sept 2024,” said Gaura Sengupta, chief economist, IDFC First Bank.
Latest fortnightly data released by the RBI showed that as on September 6, growth in aggregate deposits was 11.6% year-on-year, while credit growth was at 14.7%. While the gap remains wide enough for banks to resort to various means to mobilise funds, it has narrowed over the course of the past two years. As on September 9, 2022, year-on-year deposit growth was 9.5% and credit growth was 16.2%.