Banking system liquidity:

 

Banking system liquidity:


·       Liquidity is a measure of the cash and other assets banks have available to quickly pay bills and meet short-term business and financial obligations. It is different from the capital, which is the measure of the resourcebanks have to absorb losses.

·       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.

Reasons for the Deficit:

1.    Improvement in Demand for the Credit.

2.    Incremental deposit growth not keeping pace with credit demand.

3.    Intervention of the RBI into the forex market to stem the fall in the rupee against the US dollar.

4.    Advance tax payments by corporates.

5.    Government spending, which boosts liquidity in the market, has been slower than expected despite robust tax collections.

 

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