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    As credit demand rises, banks tweak liquidity deployment strategy


    Money & Banking

    Bankers say it is better to deploy funds with RBI for short-term rather as liquidity is being drained out

    Healthy pick up in credit, coupled with phased liquidity withdrawal by the Reserve Bank of India (RBI), seems to be prompting banks to finetune their strategy when it comes to deployment of surplus liquidity.

    This is underscored by the fact that at the 14-day variable rate reverse repo auction (VRRR) on Friday, banks collectively parked considerably lesser amount despite the cut-off rate (4.39 per cent) being higher than what the overnight standing deposit facility (SDF) offers (4.15 per cent).

    What bankers feel

    Bankers emphasised that at a time when credit growth is gaining momentum and liquidity is being gradually drained out by the central bank, it is better to deploy funds with RBI for shorter duration than locking them up for longer tenor (14 days).

    Banks deployed ₹64,965 crore in 14-day VRRR on Friday against ₹2,72,150 crore at the last auction conducted on May 20. The deployment at SDF was at ₹1,81,860 crore on June 2 (₹1,94,418 crore as on June 1), per RBI data.

    Bank credit registered a robust growth of 11.3 per cent in April 2022 compared to 4.7 per cent a year ago. Bankers say it is easier to redirect surplus liquidity deployed overnight to meet credit demand. However, if surplus liquidity is locked up for 14 days, banks will have to borrow to fulfil the credit needs.

    The aforementioned developments come even as the RBI has made a beginning (by upping the cash reserve ratio from 4 per cent to 4.50 per cent and sucking out about ₹87,000 crore in the process) to normalise liquidity in a phased manner over a multi-year period.

    Reversing the accommodation

    Ajay Manglunia, MD & Head of Investment Grade Group, JM Financial, observed that liquidity normalisation is on the agenda of the central bank and it wants to reverse all the accommodation it had provided to support the economy during the pandemic.

    Now, since the pandemic is almost over, RBI wants to gradually reduce the accommodation it had earlier provided.

    “Also, when RBI intervenes in the forex market by selling dollars, it is taking away rupee liquidity. This is serving two purposes — depreciation of the rupee is being addressed and they are able to withdraw rupee liquidity,” said Manglunia.

    Published on June 03, 2022

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