RBI has been managing liquidity quite well in challenging times
₹1-1.5 trillion on a daily basis, as has been the case since April. Yet, the bank surpluses that have flowed into the SDF have been buoyant and could lie in a range of ₹60,000-80,000 crore. This shows that the system is not one-sided.
Some banks have surpluses and invest in RBI’s overnight SDF for a return of 6.25%, while those with cash shortfalls borrow at 6.51-6.75% through the VRR and MSF windows. A closer picture is difficult to get. When individual banks raise their deposit rates for certain maturities, observers often wonder if others will follow.
A clue is that banks manage their balance sheets to match the maturities of their assets and liabilities to the extent possible. Hence, if there is a mismatch, there’s a tendency to increase rates on deposits of certain tenures to match those of assets (loans given out, i.e). Such micro moves may be purely for internal reasons.
Three elements are at work all the time. The first is what’s predictable, like tax payments to be paid on a quarterly basis. Similarly, when salaries are paid at the end of the month, liquidity improves as deposits increase.
Then second factor is less predictable, which is the level of government cash balances that reside with RBI (and are not in the system). When the government spends, funds re-enter the system, as recipients get money that is deposited. This increases liquidity.
The third is probably the least predictable, which is deposit and credit growth. If households prefer mutual funds, then deposits come down. If companies borrow more, credit growth picks up and affects the liquidity situation.
These trends evolve over time and must be watched on a fortnightly basis. Government cash balances deserve comment. As the government works
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