Banking system liquidity dropped to its lowest level in over three weeks due to a rise in credit demand, according to recent data from the Reserve Bank of India (RBI).
The net liquidity surplus stood at ₹2,884 crore on Wednesday, the lowest since June 29, when the system had a deficit of ₹13,077 crore, as per RBI data.
According to Madan Sabnavis, Chief Economist at Bank of Baroda, liquidity is declining mainly because credit growth is outpacing deposit growth. He also noted that possible RBI intervention in the forex market to control volatility could be adding pressure, with the exact impact expected to be clearer once the latest reserve data is released.
Market experts believe liquidity should improve in the coming weeks as dollar inflows under the FCNR(B) scheme are converted into rupees.
A private bank treasury head added that the government holding a large cash surplus is also contributing to tight liquidity, though it is not the main reason. However, once FCNR(B) inflows are converted into rupees, liquidity is expected to ease. If around $20 billion is converted, it could significantly improve the situation.
RBI data shows total inflows of $20.72 billion as of July 17, including $17.4 billion from FCNR(B) deposits, $1.97 billion from overseas borrowings, and $1.34 billion from external commercial borrowings (ECBs) under the swap facility.
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