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Banking System Liquidity Slides Into Deficit, RBI Data Shows

Analysts are speculating that this may lead to a possible shift in the monetary stance of the RBI

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For the first time in over three years, the banking system liquidity slipped into a deficit mode due to advanced tax payments and increasing government cash balances.  

On Tuesday, the net liquidity injection was Rs 21,873.43 crore, bucking the trend of a surplus for the first time since May 2019, as per the Reserve Bank of India (RBI) data compiled by India Ratings. When it comes to net surplus liquidity in the banking system, it was Rs 8.03 lakh crore more than the previous year. 

This led to speculation over a possible shift in the monetary stance of the RBI. Also, this might prompt the central bank to detail its liquidity management policy in the forthcoming monetary policy, keeping aside the interest rate increase delebrations.

Soumyajit Niyogi, director at India Ratings, said that Deficit banking system, though frictional, validates the shift in policy strategy from easy monetary policy to tight. It will further allow the MPC (monetary policy committee) to change the policy stance to neutral from accommodative, he added.

A review of liquidity conditions will be followed by conducting an overnight variable rate repo (VRR) auction on Thursday to infuse cash into the banking system as decided by the RBI on Wednesday.

The overnight interbank call money rate, which is the rate at which banks borrow and lend among one another, gained as much as 5.85 per cent, 45 basis points more than the policy repo rate, now at 5.40 per cent, as per data from the Clearing Corporation of India. A basis point is equal to 0.01 per cent.

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deficit liquidity banking system