India's Banking System Maintains Liquidity Surplus Amidst Volatile Conditions
India's banking system reported a liquidity surplus in the week ending May 16, 2025, with surplus funds averaging Rs 2.04 lakh crore. Despite recent tighter conditions, the call rate was 5.69%, below the repo rate. Deposit growth outpaced credit, narrowing their gap. Bond yields fell on RBI dividend expectations.
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In the week concluded on May 16, 2025, India's banking sector continued to showcase a liquidity surplus, with average excess funds recorded at Rs 2.04 lakh crore, according to a recent Union Bank of India report.
Despite the recent tighter liquidity conditions, the weighted average call rate (WACR) was pegged at 5.69%, comfortably below the current repo rate, signaling an abundance of funds within the banking system.
Additionally, the banking sector observed growth where total bank credit increased by 9.9% year-on-year as of May 2, 2025, while deposits grew at a slightly faster rate of 10%. This resulted in a narrowing gap between credit and deposits, which turned slightly negative—reflecting banks' efforts to mobilize more deposits due to earlier tighter liquidity.
Simultaneously, the domestic bond market witnessed a decline in yields, with the 10-year government security yield falling by 6 basis points, driven by expectations of a higher Reserve Bank of India (RBI) dividend transfer, estimated between Rs 2.5 lakh crore to Rs 3 lakh crore, and easing consumer price inflation (CPI).
The Reserve Bank of India has reviewed its economic capital framework, seeking governmental nod to expand its contingent risk buffer range, potentially impacting the RBI's forthcoming dividend announcement slated for May 23, 2025.
A higher market dividend than anticipated could escalate system liquidity beyond Rs 6 lakh crore, decreasing the necessity for additional open market operations (OMOs), which have predominantly been preemptively executed.
Meanwhile, the RBI has scheduled a crucial meeting this week to review its liquidity management framework, focusing on 14-day repo and reverse repo operations facilitated through shorter-term instruments. The omission of several 14-day operations of late hints at a possible shift in the central bank's liquidity management direction.
This strategic meeting arrives ahead of the June monetary policy review, potentially offering insights into imminent adjustments in the RBI's liquidity strategy. (ANI)
(With inputs from agencies.)
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