Banking System Liquidity Slips into a Deficit.

The RBI infused ₹ 218 billion($2.73 billion) into the banking system on Tuesday, the biggest since May 2019.

Squeezed by advance tax payments and ballooning government cash balances, banking system liquidity slid to a deficit for the first time in over three years.
The net liquidity injection was Rs 21,873.43 crore, according to Reserve Bank of India (RBI) data compiled by India Ratings.

Liquidity in the banking system refers to readily available cash that banks need to meet short-term business and financial needs.
On a given day, if the banking system is a net borrower from the RBI under the Liquidity Adjustment Facility (LAF), the system’s liquidity can be said to be in deficit;
If the banking system is a net lender to the RBI, the system’s liquidity can be said to be in surplus.
- A liquidity adjustment facility (LAF) is a tool used in monetary policy, primarily by the Reserve Bank of India (RBI), that allows banks to borrow money through repurchase agreements (repos) or to make loans to the RBI through reverse repo agreements.

The demand for credit:
- The improvement in demand for credit has led to the banking system’s liquidity slipping into deficit.
Depreciation of the rupee:
- There is continuous intervention by the RBI to stem the fall in the rupee against the US dollar, much like the intervention of the RBI in the forex market.
Advance tax payments by corporates:
- The recent advance tax outflow, which is a quarterly phenomenon, has further aggravated the situation.

The rise in interest rates:
- A tight liquidity condition could lead to a rise in government security yields and, subsequently, lead to a rise in interest rates for consumers too.

About
- The RBI was established in 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934.
- The RBI’s affairs are governed by a central board of directors.
- The board is appointed by the government of India.
Functions of the RBI
- The central bank issues and regulates currency notes.
- It keeps reserves to secure monetary stability and is called a banker to banks.
- The RBI plays a vital role in the economic growth of the country and in maintaining price stability.
Powers of the RBI:
- The Reserve Bank of India Act, 1934 and the Banking Regulation Act, 1949 have given the RBI broad powers of supervision and control over commercial banks—relating to
  - Licensing and establishments
  - Branch expansion
  - The liquidity of their assets
  - Management and methods of working
  - Amalgamation (merger)
  - Reconstruction and liquidation.

Content Source: Economic Times