Banking system liquidity in deficit mode

Subject : economy

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.

Banking system liquidity:

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.

Causes of this deficit:

Increased demand for credit
Advance tax outflow
Continuous intervention of the RBI to stem the fall in the rupee against the US dollar
Incremental deposit growth not keeping pace with credit demand

Impact of tight liquidity:

It could lead to a rise in the government securities yields and subsequently lead to a rise in interest rates for consumers too.