Banks crowd RBI window as interim CRR triggers deficit

livemint.com:

MUMBAI : Liquidity in the Indian banking system slipped into deficit for the first time this fiscal on the back of the Reserve Bank of India’s (RBI) temporary liquidity withdrawal, coupled with tax outflows. Liquidity stood at a deficit of ₹23,644 crore as of 21 August, according to RBI data, prompting banks to borrow a whopping ₹89,813 crore from the RBI’s Marginal Standing Facility (MSF) window on Monday, the most in a decade. On 28 June, banks had borrowed nearly ₹71,050 crore through the MSF window at 6.75%.

The repo rate is currently at 6.5%. MSF is a window for banks to borrow from the central bank in an emergency when interbank liquidity dries up. On Tuesday, the overnight call money market rate—at which banks borrow or lend to each other for a day—also hardened above the MSF rate.

Banks are facing a shortage of liquidity after the RBI ordered them to set aside 10% of their incremental deposits—known as the incremental cash reserve ratio (ICRR)— garnered between 19 May and 28 July. This move was meant to stem a liquidity surge following the return of ₹ 2,000 notes into the banking system, along with foreign inflows into the equity market and a higher-than-budgeted dividend transfer by the central bank to the government. Excessive liquidity “can pose risks to price stability and also to financial stability," RBI governor Shaktikanta Das said on 10 August.

“Hence, efficient liquidity management requires continuous assessment of the level of surplus liquidity." In August, the daily average amount of surplus funds parked by banks with the RBI was at a 14-month high of ₹2.5 trillion. After the ICRR move, the banking system is short of ₹1 trillion—the amount that is now in the RBI’s coffers. Das has assured that there