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Indian lenders have continued to borrow in the midst of the worst liquidity crisis in the banking system in nearly 30 months to tide over the strong demand for funds during the festival season as loans also dried from non-banking finance companies.
The daily net borrowing was in the range of Rs 71,000 crore and Rs 1.4 lakh crore in the month since October 8 this year, Bloomberg data showed.
The deficit has been the sharpest since between October 2015 and June 2016.
While bank borrowing rose through the Liquidity Adjustment Facility, the interbank market is yet to show strains as the overnight call money rates are still hovering around the RBI’s repo rate.
The weighted average call rate was at 6.48 per cent on Tuesday.
“The system liquidity shortage in the first week of November was tighter than usual,” said Saugata Bhattacharya, chief economist at Axis Bank.
“One possibility is that the government has garnered more tax revenues and is holding large balances with RBI, having not spent beyond the normal salary disbursements.”
“Another possibility is larger bank CRR deposits with RBI, due to a large deposit inflow into banks caused by a likely credit surge due to a diversion from non-bank sources,” said Bhattacharya said.
Cash Reserve Ratio, or CRR, is the portion of total deposits banks are mandated to set aside.
It is now pegged at 4 per cent.
On October 22, bank borrowing peaked at Rs 1.4 lakh crore.
The liquidity shortage in the banking system was magnified in the broader market as the non-banking finance companies (NBFCs) found it difficult to raise money from mutual funds shying away from making new investments.
It is RBI’s stated stance to maintain neutral liquidity: neither deficit or surplus.
“The sustained deficit is owing to festivity-led rise in cash holdings, net foreign portfolio investor (FPI) outflows in October, and some pick-up in banking credit,” said Soumyajit Niyogi, associate director, India Ratings and Research.
NBFC worries too added to the woes.
In absence of confidence and normalcy in the market, sustained system level deficit doesn’t auger well for credit market.”
“Tighter interest rates could crimp credit expansion,” Niyogi said.
About Rs 1 lakh crore worth of commercial papers issued by non-banks matured further squeezing cash availability.
Bank loans grew by a healthy 14.4 per cent, a fiveyear high during the fortnight to October 26 with non-banking entities stopping disbursements.
In October, FPIs sold net Rs 38,906 crore worth of domestic debt securities and equities, the highest monthly outflow this calendar year, data from the National Depository Securities showed.
“The sharp decline in forex reserves recently is reflecting in domestic liquidity,” said Mahendra Kumar Jajoo, head of fixed income investments at Mirae Asset Global Investments.
“Without RBI’s open market purchases and repo auctions, the liquidity deficit would have been worse.
If dollar inflows improve, it will positively impact the domestic liquidity condition.”
