India's banking system liquidity has fallen into deficit for the first time this financial year after the Reserve Bank of India's temporary liquidity withdrawal move and tax outflows. According to RBI data, as of August 21, Banking system liquidity stood at a deficit of Rs 236 billion ($2.84 billion). The surplus which reached a high of Rs 2.8 trillion at the start of this month, has been dropping, especially after the RBI told banks to hold an incremental cash reserve ratio (CRR) of 10% on an increase in deposits between May 19 and July 28, which has resulted in the withdrawal of over one trillion rupees.
Meanwhile, the cash balance with RBI as of August 21, 2023, stood at Rs 987,153.85 crore.
In recent years, RBI’s stated stance on liquidity is to maintain adequate liquidity in the system to meet the productive requirements of the economy. Excessive liquidity is believed to pose risks to price stability and also to financial stability. Regular assessment of the level of surplus liquidity helps in efficient liquidity management.
Thus, with effect from the fortnight beginning August 12, 2023, scheduled banks were asked to maintain an incremental cash reserve ratio (I-CRR) of 10% on the increase in their net demand and time liabilities (NDTL) between May 19, 2023 and July 28, 2023.
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This measure was intended to absorb the surplus liquidity generated by various factors referred to earlier including the return of Rs 2000 notes to the banking system, said the RBI Governor Shaktikanta Das in RBI's Monetary Policy Committee (MPC) meeting which concluded on August 10, 2023.
Das said, “The level of surplus liquidity in the system has gone up in the recent months on the back of return of Rs 2000 banknotes to the banking system, RBI’s surplus transfer to the government, pick up in government spending and capital inflows. The overall daily absorption under the liquidity adjustment facility (LAF) was Rs 1.7 lakh crore in June and ₹1.8 lakh crore in July 2023.”
The I-CRR will be reviewed on September 8, 2023 or earlier with a view to returning the impounded funds to the banking system ahead of the festival season.