By Dharamraj Dhutia
MUMBAI, Oct 7 (Reuters) – A sharp surge in India’s banking system liquidity will not be a long-term phenomenon, with most of the funds likely to be used up by the end of the financial year through various means, the central bank chief said on Wednesday.
The liquidity surplus in India’s banking system has averaged 7.3 trillion rupees ($75.49 billion), or nearly 2.7% of deposits since the start of September, generated mainly by $144 billion of dollar inflows as one-off schemes drew to a close.
“Today the surplus liquidity is much more than required… it is not very long that we expect these surplus liquidity conditions to last,” said Reserve Bank of India Governor Sanjay Malhotra at a press conference following a decision to hike India’s benchmark repo rate by 25 basis points for the first time in nearly four years.
“Within this financial year itself, I expect a large amount of this liquidity to get absorbed.”
Excess liquidity in the banking system can contribute to inflation, keep short-term borrowing costs lower and hinder the transmission of interest rate increases by the central bank.
The liquidity surplus in India’s banking system will ebb because of natural reasons such as “currency leakage”, banks’ reserve requirements, and through various central bank operations including sell/buy swaps, variable rate reverse repos, open market bond sales and spot currency intervention, Malhotra added.
Along with the rate hike, the RBI changed its the policy stance to calibrated tightening earlier in the day.
“The RBI has not announced any specific liquidity measures, which is indicative of the fact that the present approach of calibrating liquidity through the VRRR route will continue” Madan Sabnavis, Chief Economist at Bank of Baroda said.
Some market participants were expecting the central bank to hike the cash reserve ratio banks are required to maintain, to withdraw liquidity and improve the transmission of its rate hike. Malhotra clarified in the press conference that a CRR hike is one of the least preferred modes of removing cash.
Last month, the RBI sold debt worth 1 trillion Indian rupees ($10.34 billion) through open market operations, pushing this financial year’s sales to the highest in over a decade.
($1 = 96.7075 Indian rupees)
(Reporting by Dharamraj Dhutia; Editing by Ronojoy Mazumdar)
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