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Banking System Liquidity

Banking System Liquidity:

For the first time since May 2019, the banking system liquidity situation turned into a deficit mode of Rs 21,873.4 crore on September 20, 2022.

  • 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 Liquidity Adjustment Facility (LAF), the system liquidity can be said to be in deficit and if the banking system is a net lender to the RBI, the system liquidity can be said to be in surplus.
  • The LAF refers to the RBI’s operations through which it injects or absorbs liquidity into or from the banking system.
  • Economists say that there are various factors over the last few months that have led to the current situation.
  • If an improvement in demand for credit has led to the same, the recent advance tax outflow, which is a quarterly phenomenon, has further aggravated the situation.
  • Besides, there is the continuous intervention of the RBI to stem the fall in the rupee against the US dollar.