Profile
Settings
Refer your friends
Sign out
Why in the News?
As per the Reserve Bank of India, India’s banking system liquidity has slipped into deficit for the first time in nearly 40 months.
Key Points:
About
What is Banking System Liquidity?
- Liquidity in the banking system refers to readily available cash that banks need to meet short-term business and financial needs.
Banking System Liquidity Deficit:
- Banking system liquidity being in deficit means, banks don’t have now sufficient funds for the credit demands coming in from the customers.
- Factors Responsible:
- an uptick in the bank credit, advance tax payments by corporates, and also incremental deposit growth not keeping pace with credit demand.
- There is the continuous intervention of the RBI to stem the fall in the rupee against the US dollar.
- Increased GST outflows and Festive season cash withdrawals.
- If the banking system is a net borrower from the RBI under Liquidity Adjustment Facility (LAF), the system liquidity can be said to be in deficit.
Liquidity Adjustment Facility:
|
How do banks mitigate the Liquidity Deficit?
- Commercial banks tend to take money from the Reserve Bank of India at a repo rate.
- Further, Banks raise the deposit rates for the customers; elevated rates for deposits encourage customers to deposit larger funds into banks to earn a greater profit and banks in turn receive the liquidity which they need.
