| Company | Value | Change | %Change |
|---|
Axis Bank’s top boss Amitabh Chaudhry said the continuing liquidity deficit in the system could impact credit growth and hence the country’s GDP growth at some point, while Bajaj Finserv’s Sanjiv Bajaj said there was a need to create a dedicated liquidity support line for NBFCs, many of which were as big or bigger than banks, and catering to vast segments of society. The country’s largest lender State of India’s Chairman CS Setty added that while liquidity continues to remain tight, the availability of on-tap liquidity from RBI definitely was a good indicator.
“The regulator has taken some measures to improve liquidity, particularly daily VRR (variable rate repo), which sent a signal to market that liquidity support from the central bank will always be available…We are able to see the change in the market perception in terms of the liquidity availability. While the system liquidity is still tight and there is deficit, but the availability of on tap liquidity from RBI definitely is a good indicator. Our view is that the way global economy is behaving, a rate cut is imminent in February,” SBI Chairman CS Setty told CNBC-TV18 on the sidelines of the annual World Economic Forum (WEF) meeting at Davos.
Axis Bank’s Amitabh Chaudhry was less sanguine. “There is no liquidity in the system, the deposit growth is slow, there are elevated levels of stresses, rupee has depreciated.. so there are some factors at play which could impact this growth (of Axis Bank) going forward next year. I am very hopeful that RBI is looking at these factors. They have already started everyday auctions of VRR and they know they need to inject liquidity in the system. They know that credit growth has come to the point where it has started hurting the GDP growth to some extent so I think they will take steps and hopefully take measures that will revive this growth,” Amitabh Chaudhry, MD & CEO of Axis Bank told CNBC-TV18.
When asked if he expected a rate cut from the RBI’s monetary policy committee in the February meeting, Chaudhry said even if there were to be a cut, it may not spur economic growth without liquidity support. “A rate cut may signal a shift, but I’m not sure it will spur economic growth,” Chaudhry said, adding, “what the system really needs is liquidity back in the system. If the RBI implements the LCR guidelines as they exist, it could take Rs 5-7 lakh crore out of the system, which will have an impact.”
While banks are grappling with liquidity challenges, the tight liquidity has also made things worse for NBFCs. Bajaj Finserv’s Sanjiv Bajaj said NBFCs must be given the same kind of liquidity support that banks get from the Reserve Bank of India.
“We need to pump in greater liquidity. Liquidity is not really a challenge for the big banks. But keep in mind that a large part of our system and our credit that goes into Tier 2 & 3 certain segments & below is from NBFCs. These are large NBFCs, some of them bigger than banks. We need to make sure same kind of liquidity lines are created for us,” Sanjiv Bajaj, the Chairman and MD of Bajaj Finserv told CNBC-TV18 at Davos.
“NBFCs were not on RBI’s radar till 10-15, years ago. They are now. What they correctly did was created the layered level of NBFCs, brought in more supervision, inspection, to make them more robust, completely understandable, but now give them those additional tools also to go and do their jobs,” Bajaj explained.
“The single main thing is liquidity line for NBFCs from RBI- this creates confidence in the market…We know that in periods of tight liquidity we can tap into that. It doesn’t have to be cheap liquidity but the availability of that makes a big difference,” said Bajaj.
A Bloomberg Economics Index showed that at Rs 3.3 lakh crores (USD 38.2 billion) on Thursday, the banking system cash deficit was at its highest since at least 2010. Even the daily variable repo rate auctions that the RBI has been conducting since last week has not eased up the situation much.
In response to the liquidity constraints, the RBI on January 15 said it would conduct variable repo rate (VRR) auctions on all working days until further notice. Earlier this week, the RBI injected more than Rs 1.45 lakh crore via two overnight VRR auctions, and conducted a similar overnight VRR auction of Rs 2 lakh crores along with a 14- day auction for Rs 1.75 lakh crore today, in a bid to ease tight liquidity in the system.
VRR is a monetary policy tool used by RBI to manage liquidity in the banking system, allowing it to inject short-term liquidity into the system through the auction of repo transactions, where banks borrow funds from the central bank by pledging government securities. VRR is typically used to provide temporary relief to banks during periods of tight liquidity.
The liquidity deficit—measured as the shortfall in banking system reserves—has been exacerbated by several factors, including advance tax outflows, festive spending, as well as volatile movements in government cash balances and the RBI’s interventions in the foreign exchange market to curb the Indian rupee volatility. These elements have collectively tightened the liquidity conditions.
Tighter liquidity may lead to higher borrowing costs for banks, as they compete for scarce funds in the interbank market, driving up short-term interest rates like the call money rate. This also affects their margins, which may get squeezed due to higher costs. In extreme scenarios, banks may also become more cautious about lending, prioritising liquidity management over extending credit.
This persistent shortfall has led market participants to call for additional interventions, such as open market bond purchases and further reductions in the cash reserve ratio (CRR), to ensure effective monetary easing.