Liquidity Conditions in Indian Banking
The liquidity conditions in Indian banking have shifted considerably over recent quarters, moving from a deficit to a consistent surplus. As of 2024, the system recorded a daily surplus that sometimes exceeded ₹4 trillion.
Central Bank's Liquidity Management
- The Reserve Bank of India (RBI) faced criticism due to a liquidity deficit, largely due to currency market interventions to support the rupee.
- As pressure on the rupee decreased and inflation rates became favorable, the situation improved.
- The RBI reduced the cash reserve ratio (CRR) by 100 basis points in four tranches, adding ₹2.5 trillion in liquidity.
Effects of Liquidity on the Economy
- Excess Liquidity:
- May increase inflationary risks, though inflation is currently in a comfortable range.
- Possibly leads to asset-price inflation as banks reduce savings deposit rates.
- Loan Incentives:
- Increased liquidity might prompt banks to extend loans at lower rates.
- Easy funds could lead to loans being given to less qualified entities.
- Investment Trends:
- Global uncertainty affects private sector investment decisions.
- Corporations are increasingly raising funds from capital markets, with a 32.9% increase in 2024-25.
- The year witnessed corporate bond issuance worth about ₹10 trillion.
RBI's Monetary Policy Approach
- The RBI is conducting variable rate reverse repo auctions to manage liquidity.
- The weighted average call rate remains below the policy rate to aid policy transmission.
- The RBI needs to manage anticipated excess liquidity due to the CRR reduction and communicate its liquidity goals to the market clearly.
