Liquidity deficit surges to four-month high
liquidity, as measured by bank borrowings from the Reserve Bank of India (RBI), has widened to the highest level in four months as tax outflows and constraints on government spending amid elections have left lenders with a cash crunch, pushing up overnight borrowing costs.
The latest RBI data showed that as of May 21, net liquidity injected into the banking system was at ₹2.55 lakh crore, the highest since January 30. Fund injections by the RBI reflect banks' borrowings from the central bank's liquidity windows.
The shortfall of funds has pushed up the weighted average call rate (WACR), which represents banks' overnight cost of borrowing and functions as a determinant of other borrowing costs in the economy too. On Wednesday, the WACR closed at 6.75%, the same rate as the RBI's Marginal Standing Facility (MSF).
The MSF rate, which is the penal rate at which banks can borrow funds on an overnight basis from the RBI, is 25 basis points higher than the benchmark policy repo rate.
While the RBI's actions in the foreign exchange markets over the past couple of months and continuing strong demand for bank credit have contributed to tightening liquidity, the key driver of the fund shortfall has been the slowdown in government spending as such expenditure flows through the banking system.
«The bigger drag has been the build-up of government cash balance, which should be around ₹3.5 lakh crore right now after GST and this will increase further after the RBI dividend. The government has been trying to offload some of
