Banking System Liquidity Dips To 6-Month Low: Report

Liquidity in the Indian banking system has reached its deepest deficit in nearly six months, according to a report by The Economic Times. The stark dip in liquidity is believed to have inflated borrowing costs, as outflows due to corporate advance taxes and the Reserve Bank of India's (RBI's) likely actions to stabilize the domestic currency Indian Rupee have drained lenders of funds.

As of September 16, the RBI infused Rs 68,785.94 crore into the banking system, the highest since March 24, according to the central bank data. An injection of funds by the central bank into the banking system reflects tight liquidity conditions. Last week, an ET report said advance tax collections in the initial half of this fiscal year have grown 20% on-year to Rs 3.54 trillion.

The Indian rupee has weakened against the US dollar over the past couple of weeks on account of higher crude oil prices. Meanwhile, analysts at Jefferies have suggested that fiscal pressures for the Indian economy are rising gradually as oil prices have reached close to the $100 mark per barrel. Oil prices have increased on expectations of a supply deficit resulting from extended production cuts by Saudi Arabia and Russia and weak shale production has outweighed concerns about demand.

The RBI is said to have been intervening in the currency market via dollar sales to stop excessive volatility in the exchange rate. Dollar sales by the RBI have resulted in a drain of rupee liquidity from the banking system.
In its last Monetary Policy Committee (MPC) meeting held in August, the RBI announced an Incremental Cash Reserve Ratio (ICRR) for banks in order to reduce excess liquidity in the banking system and combat inflation risks. Earlier this month, the central bank said it would discontinue the ICRR in a phased manner. The tighter liquidity conditions have pushed up the weighted average call rate (WACR). The WACR is the operating target of the RBI's monetary policy.

The WACR, which denotes banks' overnight cost of funds, settled at 6.82% on Monday, higher than the Marginal Standing Facility (MSF) of 6.75%. The MSF represents the upper band of the RBI's interest rate corridor.
Last month, the RBI kept the repo rate unchanged for the third time in a row at 6.50%. The RBI is legally mandated to achieve a 4% CPI (consumer price index) inflation target, with a band of (+/-) 2% around it.

Meanwhile, between April 1 and September 16, 2023, India's net direct tax collection rose 23.5% at Rs 8.65 lakh crore on an annualised basis, data revealed on Monday.

The net collections have reached 47.45% of the full-year budget estimates (BE) of Rs 18.23 lakh crore. Meanwhile, Gross tax collected, before adjusting refunds, was Rs 9.87 lakh crore, up almost 18.3% year-on-year (YoY).