Liquidity surplus shoots past Rs 1 lakh crore

Mumbai: Surplus liquidity in the banking system, which had dwindled sharply earlier this month, has swollen past the ₹1-lakh-crore mark over the last couple of days as government expenditure and deposits of ₹2,000 notes have flowed to banks' coffers.

As a result, money market rates have dropped sharply, bringing down cost of borrowing for the government, and in turn corporate entities. The liquidity surplus, gauged by the Reserve Bank of India's absorption of funds from banks, was at ₹1.12 lakh crore as on May 28, the first time the figure topped the ₹1 lakh crore mark since April 20. Banks parked ₹1.04 lakh crore worth of funds with the RBI on May 29 and ₹1.35 lakh crore the day after.

In the first fortnight of May, the average daily quantum of extra funds parked by banks with the RBI dropped to ₹56,578 crore, almost four times lower than an average daily surplus of ₹2 lakh crore in the same period a month ago.


"The liquidity surplus has increased in the system. It is because of a combination of factors. One, because there has been an increase in government spending, which happens at the end of the month," Sakshi Gupta, principal economist, HDFC Bank said.

"The second thing is that the withdrawal of the ₹2,000 note was expected to increase short-term liquidity in the system. I think that to an extent is playing out and should continue to be supportive for liquidity under the LAF (Liquidity Adjustment Facility) window for the coming weeks," she said.

₹2000 NOTE IMPACT
On May 19, the RBI said that ₹2,000 notes would be withdrawn from circulation and that individuals could deposit the notes with banks starting May 23. Of the ₹3.62 lakh crore worth of ₹2,000 notes in circulation, economists broadly expected ₹50,000 to ₹1 lakh crore to flow to banks.

Initial trends suggest a healthy amount of ₹2,000 notes being deposited, with a lower-than-expected ratio of notes being converted into currencies of other denominations. On Monday, SBI's chairman said that the country's largest bank had received ₹14,000 crore worth of ₹2,000 notes so far and that ₹3,000 crore had been exchanged.

"The ratio of ₹2,000 notes being converted into currencies of other denominations is much lower than expected, with press reports indicating less than 20%. During the 2016 demonetization period, around 42% of the impacted notes were exchanged," IDFC First Bank economist Gaura Sengupta said.

“The lower conversion ratio implies that currency leakage in H1FY24 could reduce more than expected as a greater proportion is being deposited. Given that it’s still early days, we assume that around 50% of the 2,000 notes are exchanged for other notes,” she said.

After having persistently stayed above the RBI’s repo rate for much of May, the weighted average call rate (WACR), has eased significantly over the past week.

The RBI’s decision to announce a 14-day repo operation on May 19 after a hiatus of more than two months and large-scale redemptions of government bonds also improved liquidity conditions.

Yields on the Centre’s Treasury Bills and shorter-tenure government securities have eased. Sovereign bonds are the benchmarks for corporate debt.

“The timing of the impact on liquidity is important. The transient boost to liquidity takes place in H1 of the financial year and g-sec supply also tends to be concentrated in H1, with around 58% of full year gross issuance,” Sengupta said.