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Read more: ICICI Bank Q3 results preview: Net profit may rise 10%, asset quality likely to remain stable
A liquidity deficit squeezes the banks’ ability to lend, and thereby the country’s economic growth. “There is no liquidity in the system, the deposit growth is slow, there are elevated levels of stresses, rupee has depreciated.. So, there are some factors at play which could impact this growth (of Axis Bank) going forward next year.,” Axis Bank CEO Amitabh Chaudhry warned.
You can watch the whole conversation here:
A Bloomberg Economics Index showed that at ₹3.3 lakh crores ($38.2 billion) on Thursday, the banking system cash deficit was at its highest since at least 2010. Even the daily variable repo rate auctions that the Reserve Bank of India (RBI) has been conducting since last week has not eased up the situation much.
The situation is worse for non-banking finance companies (NBFCs), or shadow banks, and are forced to borrow at higher rates. “Keep in mind that a large part of our system and our credit that goes into tier-2 and tier-3 certain segments and below is from NBFCs. These are large NBFCs, some of them bigger than banks. We need to make sure same kind of liquidity lines are created for us,” Sanjiv Bajaj, the Chairman and Manging Director,
Bajaj Finserv told CNBC-TV18.
In response to the liquidity constraints, the RBI on January 15 said it would conduct variable repo rate (VRR) auctions on all working days until further notice. VRR auction allows banks to borrow funds from the central bank by pledging government securities.
Earlier this week, the RBI injected more than ₹1.45 lakh crore via two overnight VRR auctions, and conducted a similar overnight VRR auction of ₹2 lakh crore along with a 14- day auction for ₹1.75 lakh crore on January 24, in a bid to infuse more cash into the system. In an open market operation on Friday, the RBI also bought ₹10,000 crore worth of bonds, according to dealers.
The RBI is widely expected to cut interest rates in February. Will that help improve the situation? “A rate cut may signal a shift, but I’m not sure it will spur economic growth,” Chaudhry said, adding, “what the system really needs is liquidity back in the system. If the RBI implements the LCR (liquidity coverage ratio) guidelines as they exist, it could take ₹5-7 lakh crore out of the system, which will have an impact.”
The LCR norms Chaudhary referred to are the draft guidelines, issued in July 2024, which propose tightening liquidity coverage ratios (LCR) for banks to meet the rising volume of electronic payments and digital lending. You can read more about it here.
This persistent shortfall has led market participants to call for additional interventions, such as open market bond purchases and further reductions in the cash reserve ratio (CRR), to ensure effective monetary easing.
