India Faces Liquidity Crunch, Possible Ways Out of the Situation

The weighted average rate at which the Interbank call market operates soared to about 5.61% on Monday versus 5.17% last Thursday and 5.20% on Friday, reflecting a surge of nearly half a percentage point. The ungainly spike in overnight lending rates reflected a near erosion-like situation of Systematic surplus with RBI from 8lakh crore a year ago to nearly a deficit situation.

But according to economists, this ungainly soaring of the rates is not the last of it; persisting with such rates, RBI would still be in a pursuit to bridle soaring Inflation. But the surge in call money rates would lead the RBI to revisit liquidity measures. A probable creation of a dedicated repo calendar and less frequent currency market interventions.

The contraction in surplus liquidity in the banking system will likely halt the central banks' upfront spot market intervention to stem any drastic drop in the value of the rupee against the dollar, said Anindya Banerjee, currency analyst at Kotak Securities.

Surplus liquidity in the banking system moderated to Rs 3.8 lakh Crore during June –July From 6.7 lakh Crore During April-May.

Expected RBI measures to infuse liquidity

Fixed and variable Rep rate windows

•   Fixed and variable windows based on the conditions and circumstances would allow the banks to infuse liquidity into the market. Liquidity must be managed with the inbound festivities in the nation.

Long Term Repo Calendar

•   Under this approach, RBI provides longer-term loans to commercial banks to infuse money into the economy. These can vary from month to three yearlong at the prevailing market rates. The main aim of the measure is to reduce the cost of accounts as banks obtain long-term funds at lower interest rates.

Limited Spot Market Operations

•   When RBI sells out dollars to decelerate the rupee's value decline, it essentially sucks the money out of the banking system. This further strains the liquidity in the nation. Although this allows the rupee to be buoyant against the soaring dollar, it, in return, hinders the liquidity persisting in the Indian Banking system. A limited amount of Spot market operations would allow the Government to bring back the necessary liquidity in the market.

All these are provisional thought-out ways RBI can snap back the lost liquidity, but it's possible; as of now, there has not been any report communicating what RBI would do to bring back the lost liquidity in the market. With the festival season, inbound people would regard liquidity highly and help the business grow further. While India might be suffering in getting the liquidity ratios up and putting a bridle on Inflation, one aspect it has been experiencing exponential gains in has been FDI. Invest in the development of our nation and reap the benefits of future profits. In the coming days, it would become vital to notice and regard attention to the measures RBI takes to fix the situation, as these situations do not hint toward a future of brilliant prospects.

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