RBI Announces Banking System Liquidity to Peak in September, But Surplus Won’t Last Long

RBI Governor Sanjay Malhotra has announced that banking system liquidity will peak in September due to inflows from Foreign Currency Non-Resident (B) deposits, but it is unlikely to remain in a large surplus for a long time.

Liquidity to Peak in September, But Surplus Won’t Last Long

The Reserve Bank of India (RBI) has a total of $104 billion in net short positions as of June, and economists expect banking system liquidity to peak at a surplus of ₹4-5 lakh crore, prompting the RBI to start withdrawing excess liquidity through durable absorption measures.

According to Madan Sabnavis, chief economist at Bank of Baroda, assuming India attracts around $60 billion through FCNR(B) deposits, he expects banking system liquidity to rise to a surplus of about ₹5 lakh crore, which would work out to roughly 2.5% to 3% of net demand and time liabilities (NDTL).

FCNR(B) Deposits Drive Dollar Inflows

Special central bank schemes to draw foreign exchange into the country have resulted in total dollar inflows of $40.81 billion through July 31, with FCNR(B) deposits accounting for the bulk of these inflows, at about $36.72 billion, the RBI said last week.

Market Impact and Details

• Currently, system liquidity stands at a surplus of ₹3.33 lakh crore, while the daily average surplus stood at ₹1.01 lakh crore in June, RBI data showed.
• This amounts to around 1.2% of NDTL.
• FCNR(B) deposits accounted for the bulk of dollar inflows, at about $36.72 billion.
• Total dollar inflows through July 31 stood at $40.81 billion.

Key Takeaways

• The RBI expects banking system liquidity to peak in September due to inflows from FCNR(B) deposits.
• The surplus is unlikely to remain in a large surplus for a long time.
• Economists expect banking system liquidity to peak at a surplus of ₹4-5 lakh crore.

FAQs

What is the current level of system liquidity?

System liquidity currently stands at a surplus of ₹3.33 lakh crore.

What is the expected peak level of banking system liquidity?

Economists expect banking system liquidity to peak at a surplus of ₹4-5 lakh crore.

What is the role of FCNR(B) deposits in dollar inflows?

FCNR(B) deposits accounted for the bulk of dollar inflows, at about $36.72 billion.

Conclusion

The RBI’s announcement that banking system liquidity will peak in September due to inflows from FCNR(B) deposits is a significant development in the Indian economy. While the surplus is expected to peak at ₹4-5 lakh crore, it is unlikely to remain in a large surplus for a long time. As the RBI starts withdrawing excess liquidity through durable absorption measures, investors and economists will be closely watching the market impact and details. To stay ahead of the curve, it is essential to stay informed about the latest news and updates on the Indian economy.