Excess cash circulation worsens liquidity to yearly low

The expansion of cash circulation by the Reserve Bank of India (RBI) has worsened the liquidity crunch in the Indian financial system.

The average weekly liquidity deficit during the week ended December 21 has touched yearly high of Rs 1,49,635 crore, according to an analysis of data compiled by Care Ratings. In fact, on December 20, the daily liquidity deficit in the financial system touched a multi-year high of Rs 1.65 lakh crore.

Despite the RBI increasing the scale of its open market operations during the month, the liquidity deficit doubled during the week ended December 21 from Rs. 84,737 crore in the preceding week. RBI, after announcing the scaling up of its OMO purchases on the back of worsening liquidity position by Rs 10,000 for December, has pumped in durable liquidity Rs 35,000 crore into the markets during the current month.

This is the 11th consecutive week of a liquidity crunch in the Indian financial system after a whopping Rs 90,000 crore default by the shadow banking behemoth IL&FS.

Market watchers attribute the surge in liquidity deficit to the rise in cash in circulation within the country.

“The high liquidity deficit can primarily be attributed to the expansion in currency in circulation, fuelled by the wedding season, festive and year-end demand has also been a factor pressuring liquidity along with the lingering liquidity constraints faced by the NBFC sector and bank credit growth exceeding bank deposit growth,” Care Ratings said in its weekly liquidity report.

According to data released by the Reserve Bank of India (RBI), the total cash in circulation, as of December 14, stood at Rs 20.24 lakh crore, up 2.15 times in less than two years since December 23, 2016 when cash in circulation depleted to Rs 9.4 lakh crore, owing to the withdrawal of high-value currency notes (Rs 500 and Rs 1,000 denomination).

On the banking operations front, while the advances have grown by 6.3% year-to-date in the current financial year to Rs 94.76 crore, the deposits, on the other hand, have grown by almost half the rate of 3.5% to Rs 1,21,87,374 crore.

Many analysts attribute the fortnightly reporting of the Scheduled Commercial Banks to RBI as also an important factor leading to tight liquidity in the banking system.

The surge in liquidity crunch comes despite the fact that recently appointed RBI governor, Shaktikanta Das prioritising the issue.