Monthly Bulletin
Banks seem to be borrowing from RBI but not onlending to money mkt
This story was originally published at 19:54 IST on 17 January 2025
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--RBI paper: Conducive quickening of India's high-frequency data in H2 FY25
--CONTEXT: Comments from RBI's monthly State of the Economy article
--RBI paper: Sticky food inflation warrants monitoring of 2nd order effects
--RBI paper:India's econ growth poised to rebound as demand regains strength
--RBI paper: Rising input cost pressures in mfg a risk to growth outlook
--RBI paper: Deficit liquidity, funds in SDF suggest distribution is skewed
--RBI paper:Bks seem to be borrowing from RBI but not onlending to money mkt
NEW DELHI – The Reserve Bank of India staff has said that banks appear to be borrowing from the central bank but are not onlending to the money markets, leading to skewed distribution of liquidity in the banking system.
"The co-existence of deficit liquidity conditions and funds deployed in the SDF (Standing Deposit Facility) is indicative of skewed distribution of liquidity in the banking system," the State of the Economy article in the RBI's monthly bulletin said.
Banking system liquidity has remained in deficit since mid-December due to build-up in government cash balances driven by the usual quarter-end advance tax outflows and monthly Goods and Services Tax payments, the RBI staff said.
The article is written by the RBI staff, including Michael Patra, whose tenure as deputy governor ended on Tuesday. The views expressed in the article do not reflect the central bank's official stance.
To address the liquidity tightness, the RBI has cumulatively injected INR 12.55 trillion into the banking system via two main and sixteen fine-tuning variable rate repo operations of 1-7 days maturity during Dec. 16 and Jan. 16, the paper said. The central bank earlier this week announced that it will conduct daily VRR auctions on all working days until further notice.
The daily VRR auctions are likely to iron out some of the distortions in money market rates, it does not provide the medium-term assurance that the market needs, according to bankers and analysts.
Analysts are of the view that easier liquidity conditions are required for transmission of a rate cut, should the RBI's Monetary Policy Committee decide to lower the repo rate in February.
GROWTH-INFLATION BALANCE
India's economic growth is poised to rebound as domestic demand regains strength, the paper said. "In India, there is a conducive quickening of high frequency indicators of economic activity in the second half of 2024-25 (Apr-Mar), bearing out the implicit pick-up in real GDP growth for this period in the annual first advance estimates of the NSO (National Statistics Office)," the paper said.
The government has estimated the GDP to grow at a four-year low pace of 6.4% in FY25. According to the paper, rural demand continues to gain momentum, reflecting a resilience in consumption, supported by brighter agricultural prospects.
A revival in public capital expenditure on infrastructure is likely to stimulate growth in key sectors, the paper said. However, rising input cost pressures in the manufacturing sector and weather-related exigencies could pose risks to this outlook.
Headline CPI inflation fell to a four-month low of 5.22% in December as food prices declined sequentially. Food inflation also eased to a four-month low in December, but remained high at 8.39%.
The RBI staff warned that the stickiness in food inflation warrants careful monitoring of second order effects. End
Reported by Shubham Rana
Edited by Deepshikha Bhardwaj
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