India’s banking system liquidity slipped into deficit, indicating sparkling business sentiments –

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For the first time in around 40 months, India’s banking system liquidity has slipped into deficit. Spurred by the development, Reserve Bank of India (RBI) made the biggest financial infusion into banking system on Tuesday.

The central bank has made an infusion of Rs 21,800 crore into Indian banking system to make it able to continue serving the credit demands of the customers. Since, May 2019, this infusion is the largest for the sector.

However, the overnight rates continue to stay raised and one-day call money rate also jumped to 5.85%, which is the highest since July 2019.

Banking system liquidity being in deficit means, banks don’t have now sufficient funds for the credit demands coming in from the customers. Generally, bank management ensures that sufficient funds are available at a reasonable cost to meet the potential demands from the customers.

However, in such a situation when banking system liquidity goes in deficit, banks seek funds from Reserve Bank of India to serve the credit demands from the businesses and individuals.

The prevailing situation is an indication to an encouraging trend when business sentiments and activities are on the rise and they need money from the financial institutions to further expand their activities.

There have been high credit demands ever since the Covid impacts weakened and business sentiments went up, spurring the economic activities all around related to almost all sectors of the economy including service sector, which constitutes around 60 percent of the Indian Gross Domestic Product (GDP) and in terms of employment it contributes considerably high comparing with manufacturing, agriculture and others.

When banking system liquidity slips into deficit, commercial banks tend to take money from the central bank at repo rate. Moreover, banks also tend to invariably raise the deposit rates for the customers, which do benefit the depositors. Now depositors may expect raised interest rates on their fixed deposits and others. 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.