Increase in liquidity surplus may not continue till end of financial year as demand picks up: Report

Mumbai:

Economists said the recent increase in liquidity surplus in India’s banking system due to government spending and capital inflows may not be sustainable as cash demand rises towards the end of the financial year.

Liquidity surpluses in India’s banking system averaged over Rs 1.50 trillion ($18.11 billion) on a daily basis from December 1 to December 14, compared to around Rs 500 billion in November and less than Rs 100 billion in October.

“Liquidity has improved because of heavy spending by the government towards the end of the month,” said Vivek Kumar, an economist at Quantico Research.

“We believe the surplus in liquidity in the banking system will moderate as cash demand may intensify seasonally, resulting in an incremental outflow of at least Rs 1 trillion before the end of FY2023,” Kumar said. “

IDFC First Bank expects liquidity to be in a “mild deficit” by March.

Gaura Sen Gupta, India economist at IDFC First Bank, said the private bank expects a payments deficit of $61 billion and a currency leakage of 2.3 trillion rupees for this fiscal year.

Gaura Sen Gupta said that the deficit can be balanced by a possible increase in expenditure by the states as well as the central government.

Earlier this month, Reserve Bank of India Governor Shaktikanta Das attributed the improvement in liquidity conditions to increased government spending and higher foreign inflows.

Some market participants pointed to RBI’s dollar purchases which infused cash into the system.

The Indian rupee had peaked at 80.51 against the dollar in November, registering its first monthly gain this year.

“Banking system liquidity surplus has also widened on dollar purchases by the RBI amid recent rupee appreciation pressure,” said Kumar of Quantico Research.

Foreign investors pumped over $4 billion into India’s equity markets in November, while government bonds also whetted their appetite.

“Unless we see a meaningful improvement in inflows, the liquidity situation will worsen. Government spending alone may not be able to keep liquidity in surplus,” said Soumyajit Niyogi, Director, Core Analytical Group at India Ratings & Research.

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