Indian Banking Liquidity Deficit Surges to Over a Decade High
Mumbai, India - The liquidity deficit in the Indian banking system has reached its highest level in over a decade, driven by likely dollar sales by the central bank (Reserve Bank of India) to curb rupee volatility.
On Thursday, the banking system cash deficit hit 3.3 trillion rupees ($38.2 billion), the highest since at least 2010. This is measured by banks' borrowings from the RBI.
IDFC First Bank Ltd. believes that the RBI has been selling dollars throughout the year to support the depreciating rupee.
Amidst the cash crunch, large bond purchases by a group that typically includes the central bank sparked speculation that the authority bought notes. This could potentially increase long-term liquidity in the banking system.
Data from Clearing Corporation of India Limited shows that the "others" category, which usually includes the monetary authority, made net government bond purchases worth 72.22 billion rupees ($840 million) on Thursday, the highest since June 2023.
The RBI has increased its liquidity support measures, including daily variable repo rate auctions on working days. Experts believe that the RBI needs to proactively infuse more liquidity.
The yield on the 10-year government bond declined one basis point to 6.72% on Friday, falling five points this week.