Liquidity deficit in the banking system is expected to remain tight till the end of ongoing financial year, according to economists.
As on Feb. 22, the liquidity deficit—measured by the amount banks borrowed from the Reserve Bank of India through the repo window—stood at Rs 2.37 lakh crore, data showed.
While RBI has been managing the liquidity through several fine-tuning operations, it is comfortable with the current conditions given the monetary policy stance of withdrawal of accommodation, the economists said.
"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 told NDTV Profit.
One of the key reasons for the RBI to continue with its toolkit of variable rate repo auctions is the incomplete transmission of policy rate hikes in the banking system.
"Our stance of withdrawal of accommodation should be seen in the context of incomplete transmission and inflation ruling above the target of 4% and our efforts to bring it back to the target on a durable basis," RBI Governor Shaktikanta Das said in his monetary policy statement on Feb. 8.
The central bank "remains nimble and flexible" in its liquidity management through two-way main and fine-tuning operations, in both repo and reverse repo auctions, Das said. "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," he added.
The central bank has stressed the need for better transmission of the 250 basis points of rate hikes it carried out from May 2022 to February 2023. According to the RBI data, the transmission on lending rates lags by 69 basis points currently. The monetary policy committee has not raised benchmark repo rate from 6.5% for six straight meets.
"Transmission has not really happened to the extent RBI would have liked. Therefore, they are not completely certain on risks around inflation or whether the inflation has stabilised or moving towards deceleration path towards 4%," Gupta added.
"They want to keep liquidity conditions conducive to greater transmission. These conditions tide for a little bit longer before they feel comfortable with inflation," she said.
In December and January, the RBI conducted nine fine tuning variable rate repo auctions of 1 to 7 days maturity amounting to Rs 7.75 lakh crore, while two main VRR operations injected Rs 4.25 lakh crore into the system. Between Feb. 2 and Feb. 7, the central bank undertook six fine-tuning variable rate reverse repo auctions to absorb surplus liquidity. Against a total notified amount of Rs 3.25 lakh crore, the amount absorbed through these auctions was Rs 1.53 lakh crore, according to RBI data.
Vivek Kumar, economist of QuantEco Research believes that it does not make sense for the RBI to take aggressive measures--such as cut in cash reserve ratio or an open market purchase of government bonds--to ensure durable liquidity in the banking system.
Any such tools would impede the efforts to contain inflation in the RBI's target range of 2-6%, he said.
"We continue to expect 14-day VRR auction to be used as the main signaling tool with active fine tuning operations (via both VRR and VRRR auctions) on high frequency basis to address frictional liquidity challenges," he added.
Core liquidity, which accounts for government cash balances that periodically flow in and out of the banking system, is expected to tighten as well but gradually, Kumar said. This would be a function of advance tax payments start towards the end of the quarter and a seasonally higher currency-in-circulation in the financial system.
"We expect core liquidity surplus to continue moderating organically due to seasonal as well as election related cash outflow from the banking system. The RBI could take delivery of its $5 billion FX swap in March to provide a partial offset," Kumar said. "Beyond that, durable liquidity infusion from the central bank is unlikely as long as it is in inflation fighting mode," he added.
Most economists said that pick up in government spending will move the needle on liquidity deficit conditions.
Madhavi Arora, lead economist of Emkay Global Financial Services highlighted a "structural change in government tax receipts and spending behaviour," which has resulted in a liquddity mismatch.
"...the shift in tax behaviour this year has been more streamlined than spending, leading to a liquidity mismatch, that neither government nor the RBI could envisage," she said in a note. Arora expects liquidity deficit to ease to 0.5-0.8% of net demand and time liabilities in the coming months, to Rs 1-1.5 lakh crore. "This liquidity situation is still tight vs last one year average," she added.
Tightrope For Banks To Mobilise Deposits
Acute liquidity crunch in the financial system has led banks to scramble for funding sources in the recent months. Banks are falling short of funds to fuel credit demand in the country. While the credit growth was registered at 21.3% as on Feb. 9, the deposit growth has been stagnant at 13%, according to the RBI's latest data.
Some banks have resorted to hiking deposit rates, too. "We see deposit rates peaking here on, even as credit-to-deposit ratio is near 80%. We see system liquidity issue to persist, even as they ease from January peak," Arora said.
This may result in some moderation in margins, but at a slower pace, she added.
Amit Khurana, head of equities of Dolat Capital Market Private Ltd. also agrees.
"It is already playing out. Margins are going to be under pressure," Khurana said. "The advantage of recoveries of NPAs is off the scene now. Provisions were being written back, and on that basis, banks were growing their credit book," he added.
Khurana expects banks to scale back on lending, instead of raising deposit rates going forward as borrowers may not afford higher lending rates hereon.
"Now, the choice is either to raise high-cost deposits and go for high-cost lending, or to slow down credit book. In my opinion, they will slow down their credit book because do borrowers have appetite at higher lending rates? I have my doubts." he added.
Citi Research has noted that most banks have peaked their retail deposit rates.
HDFC Bank and IndusInd Bank have improved their peak retail term deposit rates by 25 basis points to stay competitive, while ICICI Bank and Axis Bank raised it by 10 basis points.
However, Kotak Mahindra Bank has not increased deposit rates in less than 24-month tenors, but offers peak rate of 7.25% in 24-month bucket. It had raised deposit rates by 50-75 basis points on up to 60-month tenors. AU Small Finance Bank, too, has increased retail term deposit rates in 18-month tenor by 50 bps to 8%, and to 7.75% in 18-24 month tenor. RBL Bank offers peak retail deposit rate of 8% in 18-24 month bucket.
Among public sector banks, Punjab National Bank is offering peak term deposit rate in less than a year bucket at 7.05%, against 7% prevailing in the last 2-3 years. Bank of Baroda has also peaked its term deposit rates of 7.25% in the 2-3 years segment. SBI's peak deposit rates continues to be the lowest at 7% in 2-3 years bucket.
"All eyes are on deposit mobilisation. Q3 deposit growth was underwhelming; bank’s narrative for loan growth is anchored around deposit growth. At this juncture, it becomes relevant to track incremental rate actions to gauge respective banks' deposit approach," Citi Research said in a note.
For wholesale deposits under Rs 50 crore ticket size, Axis Bank offers premium rate in 1-year tenor at 7.8%, and HDFC Bank offers 7.4% in less than three-month bucket. Kotak Mahindra Bank, however, offers a slightly higher rate of 7.55-7.60% in the segment. ICICI Bank remains least aggressive on wholesale deposit rates.
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