Indian banks grapple with $10m liquidity crunch

Lower government spending and higher cash withdrawal contributed to the deficit.

The liquidity deficit in Indian banks almost doubled to $10.1m (INR702.66m) by 16 April in just 13 days, from $4.5m (313.96m) in 3 April, according to data from the Bloomberg India Banking Liquidity gauge as reported by the Economic Times. The muted government spending paired with high-election related spending curbed efforts from the Reserve Bank of India’s to infuse liquidity into the system through bond purchases and innovative dollar rupee swap

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According to Soumyajit Niyogi, associate director at India Ratings, factors such as the ongoing weekly high central and state government bond auctions also pushed the deficit problem, as the central bank has sold about $2.8b ($200b) state and central government debt on average in the first two weeks of April.

The liquidity deficit may cross $140b (INR1t) by the end of last week in April, experts said.

Also read: Indian banks hit by liquidity crunch

“Extended deficit liquidity could become detrimental to smoother monetary policy transmission,” said Upasna Bhardwaj, senior economist at Kotak Mahindra Bank. “GST collections towards the end of the week are expected to have further increased the cash balance and worsened liquidity deficit given the absence of aggressive spending,” she said. c

The RBI has injected $4.28t (INR298t) in liquidity into the banking system from 2018 to 2019 and conducted a dollar swap auction for $5b (INR345b) as part of its efforts to facilitate the recovery of the banking system.