Cash is sloshing in banking system, surges to Rs 2.3 trillion

State Bank of India has Wednesday reduced its marginal cost based lending rate (MCLR) by 10 basis points across all tenors with effect from October 10, making it the bank's sixth cut in MCLR in FY20.

Liquidity in the banking system has surged to a record Rs 2.3 lakh crore amid sluggish consumption demand, even as it is creating a platform for banks to pass on the rate cuts effected by Reserve Bank of India.

State Bank of India has Wednesday reduced its marginal cost based lending rate (MCLR) by 10 basis points across all tenors with effect from October 10, making it the bank's sixth cut in MCLR in FY20.

“The higher dividend payment by RBI and its continued forex intervention have contributed to structural glut in the system liquidity in the recent weeks. Moreover, CIC (currency in circulation) leakage has been weak on account of weak economic activity which further supporting the benign liquidity situation,” said B Prasanna, group head for global markets sales, trading and research at ICICI Bank.


He expects adequate liquidity scenario is expected to stay longer as the advance tax outgo on account of direct taxes during Q3 is likely to be significantly lower post sharp reduction in corporate taxes which will further cushion the liquidity situation.

This provides banks comfort on the lending side but it remains more of a demand side problem. Rural demand may start picking up November onwards when harvesting begins. The decision to raise dearness allowance to 17% from 12% for central government employees and pensioners is also aimed at boosting sentiment ahead of Diwali.

"Consumption demand has not yet picked up," said Gopal Tripathi, treasury head at Jana Small Finance Bank. "The latest record liquidity surplus reflects that. We have not seen such level of liquidity in the past barring post demonetization period. But, this offers an opportunity for banks to cut rates luring borrowers as the economy is set to expand in coming quarters."
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“However, revival in corporate lending is still long way to go as output gap still remain wide and peripheral issues in NBFCs sector is keeping the consumer demand weak,” said ICICI Bank’s Prasanna.

“Q2FY20 is expected to be slower than Q1FY20 with consumer demand further decelerating,” said Ashit Desai, senior research analyst at Emkay Global Financial Services, while expecting lower revenue growth for consumer goods companies.

There has been a decline in credit between April-August, which is witnessed in all segments except retail where there has been growth of 3.7%.

RBI has lowered policy rates by 135 bps since February, while the weighted average lending rate on fresh rupee loans of commercial banks dipped merely 29 bps, keeping capital cost higher than expected.
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Meanwhile, sustained surplus liquidity has brought down banks dependence on corporate deposits and lowered money market rates. “However if the situation persists for long, that could distort normalcy in in the money market,” said Soumyajit Niyogi, associate director (core analytical group) at India Ratings & Research.

“From supply side Rs 3.5 lakh crore liquidity infusion by RBI and surplus FPI flows at current have boosted base money, whereas low economic activities and weak demand from credit are the demand side factors. If the demand side continues to remain subdued, ideally this will erase scope for OMO purchase in the remaining fiscal,” Niyogi said.
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