Published: 29th Sep, 2022
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Liquidity Adjustment Facility (LAF):
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Context
The Surplus liquidity in the banking system has been decreasing sharply for the past couple of months due to numerous reasons.
About
Details:
- Since, May 2019, the “banking system liquidity” situation turned into a deficit mode of Rs.21, 873.4 crore on September 20, 2022.
Banking System Liquidity:
- Liquidity is a measure of the cash and other assets banks have available to quickly pay bills and meet short-term business and financial obligations. It is different from the capital, which is the measure of the resourcebanks have to absorb losses.
- If the banking system is a net borrower from the RBI under Liquidity Adjustment Facility (LAF), the system liquidity can be said to be in
- If the banking system is a net lender to the RBI, the system liquidity can be said to be in
Possible Factors that triggered this Deficit:
- Upward Trend in demand for Credit: The credit growth of commercial banks is at a near nine-year high of 5 per cent year-on-year for the week ended August 26.
- Incremental deposit growth against high credit demand:Deposit growth lags far behind at 9.5 per cent.
- Advance tax payments by corporates: Advance tax outflows have been responsible for the latest round of liquidity tightness.
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Advance tax is paid as and when the money is earned in four instalments, rather than at the end of the fiscal year. |
- The intervention of the RBI to manage the fall of the rupee:When the RBI sells dollars in the currency market in order to prevent excessive volatility in the exchange rate, the central bank sucks out the rupee liquidity.
- Other contributing factors are increased GST outflows and Festive season cash withdrawals.
Impact of tight liquidity conditions on customers:
- Banking system liquidity being in deficit means, banks don’t have sufficient funds for the credit demands coming in from the customers.
- A tight liquidity condition could cause a rise in the yields on government securities, which would then lead to an increase in interest rates for consumers.
- Because the RBI is expected to raise interest rates by another 50 basis points (bps) this cycle, a rise in the repo rate will result in a higher cost of funds.
- Banks will raise their repo-linked lending rates as well as the marginal cost of funds-based lending rate (MCLR), which is linked to all loans.
- Consumers will face higher interest rates as a result of this increase.
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