Context:
The banking system cash deficit, as measured by banks’ borrowings from the Reserve Bank of India, was at 1.5 trillion rupees ($17.7 billion) as of Monday, the highest since June 24,
What is Banking Liquidity Deficit?
Liquidity means available cash that banks need to meet short-term business and financial needs.
- Reason of Liquidity Deficit?
- Increase in bank credit, corporate payment of advance tax, and growth in deposits not keeping pace with credit demand.
- Increased GST outflows and festive season cash withdrawals.
- The RBI is working continuously to avoid the depreciation of rupees against dollars.
- Only in case of a net borrowing of the banking system from the RBI under Liquidity Adjustment Facility (LAF) can the system liquidity be said to be in deficit.
Liquidity Adjustment Facility:
- The LAF refers to the operations of RBI under which it injects or absorbs liquidity into or from the banking system.
- How do banks mitigate the Liquidity Deficit?
- Commercial banks generally borrow from the Reserve Bank of India at repo rate.
- Banks raise the deposit rates for the customers; higher the rates for deposit; more holds the customer deposits in banks to gain more profit for banks.
