New Delhi, Feb 26 (KNN) Economists anticipate that the liquidity deficit in the banking system will persist until the end of the current financial year.

As of February 22, data reveals that the liquidity deficit, measured by the amount banks borrowed from the Reserve Bank of India through the repo window, reached Rs 2.37 lakh crore, reported NDTV.

While the RBI has undertaken various fine-tuning operations to manage liquidity, economists suggest that the central bank is comfortable with the current conditions, aligning with its monetary policy stance of withdrawing accommodation.

“There is a concern on the banking sector because durable liquidity has come off so much over the last few quarters,” Sakshi Gupta, Principal Economist at HDFC Bank said.

The incomplete transmission of policy rate hikes within the banking system prompts the RBI to continue utilising variable rate repo auctions. Governor Shaktikanta Das emphasises the importance of better transmission and mentions the central bank's commitment to maintaining financial stability through flexible liquidity management.

“We will deploy an appropriate mix of instruments to modulate both frictional and durable liquidity so as to ensure that money market interest rates evolve in an orderly manner and financial stability is maintained,” Das added.

Despite the RBI's efforts, the transmission of rate hikes remains incomplete, indicating uncertainties around inflation risks. The central bank conducted several fine-tuning variable rate repo auctions and main VRR operations in December and January to inject liquidity into the system.

However, economist Vivek Kumar suggests that aggressive measures to ensure durable liquidity, such as cutting the cash reserve ratio or purchasing government bonds, may hinder inflation containment efforts.

Core liquidity, influenced by government cash balances and seasonal factors like advance tax payments, is expected to tighten gradually.

Kumar predicts a moderation in core liquidity surplus due to seasonal and election-related cash outflows. However, he believes that durable liquidity infusion from the central bank is unlikely as long as it prioritises combating inflation.

Most economists argue that an increase in government spending could alleviate liquidity deficit conditions. Madhavi Arora, lead economist of Emkay Global Financial Services, points out a structural change in government tax receipts and spending behaviour leading to a liquidity mismatch.

She expects the liquidity deficit to ease in the coming months but notes that the current situation remains tight compared to the average of the past year.

(KNN Bureau)