Here's what 'deficit mode' in banking system means

On September 20, 2022, the banking system’s liquidity situation entered a deficit mode for the first time since May 2019. In comparison, the liquidity surplus in November 2021 was Rs 8 lakh crore as the Reserve Bank of India (RBI) provided liquidity support to the economy dealing with the aftereffects of the Covid pandemic.

The liquidity surplus was Rs 6.7 lakh crore on September 20, 2021. Multiple factors are at work here, including an increase in bank credit, advance tax payments by corporations, and incremental deposit growth that is not keeping pace with credit demand.

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Here's what 'deficit mode' in banking system means
Here’s what ‘deficit mode’ in banking system means

In the banking system, liquidity refers to readily available cash that banks require to meet short-term business and financial needs. On any given day, the banking system’s liquidity is said to be in deficit if it is a net borrower from the RBI under the Liquidity Adjustment Facility (LAF), and it is said to be in surplus if it is a net lender to the RBI. The LAF refers to the operations of the RBI that inject or absorb liquidity into or out of the banking system.

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Economists believe that a number of factors have contributed to the current situation over the last few months. If an increase in credit demand has contributed to this, the recent advance tax outflow, which is a quarterly occurrence, has exacerbated the situation.

The outstanding bank credit was Rs 124.58 lakh crore as of August 26, 2022, up 4.77% (Rs 5.7 lakh crore) from Rs 118.9 lakh crore as of March 25, 2022, according to the most recent data from the RBI. Nevertheless, the growth in deposits was only 3.21% (or Rs 5.3 lakh crore) from Rs 164.65 lakh crore on March 25, 2022, to Rs 169.94 lakh crore on August 26, 2022.