(Bloomberg) — The liquidity shortage in India’s banking system has reached the highest level in almost six months due to tax prepayments by companies and likely dollar sales by the central bank to curb rupee volatility.
The cash deficit in the banking system, measured by banks’ borrowings from the Reserve Bank of India, reached 1.5 trillion rupees ($17.7 billion) on Monday, the highest since June 24, according to a Bloomberg Economics index. The RBI has been on net selling in dollars since October, which has resulted in significant liquidity loss, according to IDFC First Bank Ltd.
Bank liquidity could increase further if the RBI intervenes in the foreign exchange market to curb currency losses due to a rising trade deficit and a stronger dollar. The rupee hit a new record low of 84.9337 per dollar on Tuesday.
The cash shortage has widened even as the central bank has recently taken steps to boost banking system liquidity, including a reduction in the cash reserve ratio and higher amounts of funds offered through so-called floating rate repo auctions.
“Even after the CRR cut, overall liquidity is likely to be neutral to marginally negative,” said Anubhuti Sahay, economist at Standard Chartered Bank. “More measures are needed to increase liquidity or maintain it in surplus in the future, whether through open market bond purchases, more term repos, currency swaps or another cut in the CRR.”
Read: Dollar sale by RBI leaves Indian banks without liquidity
The cash shortage pushed the interbank weighted average call rate – a measure of the cost of short-term borrowing – soaring to as much as 35 basis points above the central bank’s benchmark rate of 6.50%.
The advance payments to Indian companies, which are due in the last month of every quarter, add to the liquidity pressure.
A typical increase in cash withdrawals from banks towards the end of the year due to festive demand also contributes to the shortfall.
According to Gaura Sengupta, chief economist at IDFC First Bank Ltd, the latest round of quarterly tax advances has drained the banking system of resources worth Rs 1.4 trillion.
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