Axis Acumen - Banking Liquidity
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Is The Best Of Banking Liquidity Behind Us?
Synopsis Banking liquidity which was in surplus since July 2024 has started falling into deficit due to forex outflows and increase in currency in circulation. We believe that the best of banking liquidity is behind us and expect it to be neutral to deficit for most part of the next quarter. The acumen talks about the tools RBI can use to manage liquidity and our view on how money market yields and operative rate will be impacted by liquidity going forward.
The scenario so far
Banking liquidity (liquidity related concepts explained in Annexure) is one of the important tools used by the Reserve Bank of India (RBI) to drive the operative rate and at times monetary policy stance. FY25 has seen significant fluctuations in banking liquidity, influenced by various macroeconomic factors as outlined below:
? In Q1, banking liquidity experienced a deficit as elections embargo led to reduced Government spending
? Huge build up of Government Surplus post transfer of RBI dividend (Govt Surplus touched a high of Rs 5 trillion in June 2024)
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? Fall in durable liquidity in Q3 on account of huge forex outflows (Oct/ Nov 2024)
? Increase in Currency in Circulation (CIC) due to elections Given that Banking liquidity was in surplus since Q2 FY 2024, the operative rate stood below the Repo rate of 6.5%. However, this is now inching towards deficit on account of forex interventions by the RBI.
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3 个月Very Insightful, Axis Mutual Fund Thanks for inviting, sharing an informative-insightful article, & Best wishes, to Team #Axis Mutual Fund...! Syed Awees, ACCA. Syed Suheb.