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Informist, Wednesday, Mar. 19, 2025

 

--RBI paper:India continues to demonstrate resilience amid global challenges

--CONTEXT: Remarks from RBI's monthly State of the Economy article

--RBI paper: High-frequency data suggests demand remained resilient Jan-Mar

--RBI paper: See sign of increased liquidity preference on part of banks

 

NEW DELHI – Indian banks are showing signs of "increased liquidity preference" in addition to uneven distribution of funds, Reserve Bank of India staff said Wednesday in their monthly State of the Economy article.

 

"The co-existence of deficit liquidity conditions and substantial fund placements under the SDF (Standing Deposit Facility) suggests the asymmetric distribution of liquidity within the banking system as well as increased liquidity preference on the part of banks," the article said.

 

The article, part of the monthly bulletin of the central bank, does not represent the views of the central bank.

 

While the RBI has in recent months made note of asymmetric distribution of liquidity in the banking system, this is the first time it has said banks are increasingly holding on to more funds. As per the article, banks parked INR 1.15 trillion on average at the Standing Deposit Facility between Feb. 16 and Mar. 13, up from INR 0.85 trillion in the preceding month.

 

Liquidity conditions have deteriorated sharply in recent months, prompting the RBI to act aggressively. Starting with its Cash Reserve Ratio cut in December, the central bank is on track to infuse more than INR 8 trillion of durable liquidity by the end of March through its various instruments. These measures helped bring down the average daily net injection under the Liquidity Adjustment Facility to INR 1.41 trillion during Feb. 16-Mar. 13 from INR 1.92 trillion during Jan. 16-Feb. 15, the article said on Wednesday.

 

The RBI, which began easing liquidity conditions after the Monetary Policy Committee meeting in October relaxed its stance to neutral from withdrawal of accommodation, is expected to follow up last month's rate cut with another one in April, especially with headline retail inflation falling to a seven-month low of 3.61% in February and GDP growth pegged at 6.5% for the current financial year.

 

In Oct-Dec, GDP growth missed expectations by coming in at 6.2%. While higher than Jul-Sept's shocking number of 5.6%, it was well below the 9.5% growth recorded in the third quarter of FY24.

 

However, the RBI article said high-frequency indicators suggest aggregate demand "continued to remain resilient" in the final quarter of 2024-25 (Apr-Mar), GDP data for which will be released at the end of May, adding that the Indian economy "continues to demonstrate resilience" in a "turbulent global environment".

 

"Policymakers are now walking a tightrope, having to balance the upward strain of rising prices on account of tariffs and currency depreciation, as well as the downward pressure on inflation from economic slowdown. The stubbornness of headline inflation in AEs (advanced economies), along with a sticky core and services inflation, could act as a constraint on monetary policy being used as a tool to counteract the potential slowdown engendered by the tariff war," the article said, adding that emerging economies remain vulnerable to the contagion effects of these developments through the trade, capital flows, and currency depreciation channels.  End

 

Reported by Siddharth Upasani

Edited by Akul NIshant Akhoury

 

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