Wednesday, 29 June, 2022
HomeEconomyBlame it on RBI – Indian banks have Rs 8 lakh crore...

Blame it on RBI – Indian banks have Rs 8 lakh crore sitting idle in their systems

The Rs 8 lakh crore with banks exceeds the level seen after demonetisation in 2016 and is expected to be the new normal for the next few months at least.

Text Size:

Mumbai: The Reserve Bank of India’s efforts to keep a lid on borrowing costs in Asia’s third-largest economy created more than Rs 8 lakh crore ($108 billion) of excess cash in the banking system. Sponging away the extra money isn’t going to be easy.

A largely benign outlook for inflation amid a slump in demand, slowdown in credit growth, a sharply positive balance of payments and lessons from the RBI’s own cash-tightening three years ago suggest that this amount of cash — which exceeds the level seen after a surprise cash ban in late 2016 — will be the new normal for the next few months.

“I don’t think this liquidity is moving away in a hurry,” said Ritesh Bhusari, deputy general manager for treasury at South Indian Bank. “Unlike demonetisation, which was the fallout of an economic policy decision, excess liquidity this time is a creation of the central bank. It may stay for the next six months.”

The liquidity measures taken by the RBI since February aggregate to Rs 9.57 lakh crore, or about 4.7% of gross domestic product. That pushed up the excess cash banks park with the authority to more than 8 trillion rupees in May.

Liquidity Glut

The central bank’s management of the liquidity glut came into focus this month when Governor Shaktikanta Das for the first time spoke about the need for a careful strategy to exit from the extraordinary monetary stimulus. To be sure, he made it clear that it was not imminent.

The situation has drawn parallels to late 2016 when Prime Minister Narendra Modi’s shock high-value cash ban led to a surge in deposits with banks. As liquidity rose in 2017, the RBI began open-market sale of bonds, mopping up about Rs 900 crore.

This time around, the authority needs the excess liquidity to induce banks to absorb the government’s blowout bond supply.

Bloomberg Economics expects a record $95 billion surplus on the balance of payments in fiscal 2021. That would largely be met by forex purchases to prevent rupee from gaining further.

Net FX purchases of $80 billion in fiscal 2021 would lead to a Rs 6 lakh crore liquidity injection into the system, which has already been running a record surplus since the start of the fiscal year, according to Abhishek Gupta, India economist at Bloomberg. – Bloomberg


Also read: Inflation could surge to 12% if RBI starts printing money to fund govt, Rabobank says


 

Subscribe to our channels on YouTube & Telegram

Why news media is in crisis & How you can fix it

India needs free, fair, non-hyphenated and questioning journalism even more as it faces multiple crises.

But the news media is in a crisis of its own. There have been brutal layoffs and pay-cuts. The best of journalism is shrinking, yielding to crude prime-time spectacle.

ThePrint has the finest young reporters, columnists and editors working for it. Sustaining journalism of this quality needs smart and thinking people like you to pay for it. Whether you live in India or overseas, you can do it here.

Support Our Journalism

Most Popular

×