What banking system liquidity going into ‘deficit mode’ means

Source: The post is based on the article “What banking system liquidity going into ‘deficit mode’ means” published in Indian Express on 24th September 2022

What is the News?

For the first time since May 2019, the Banking System Liquidity situation turned into a deficit mode.

What is 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.

What has triggered this deficit?

There are two main reasons for this deficit: recent advance tax outflow and continuous intervention of the RBI to stem the fall in the rupee against the US dollar.

What will be the impact of this deficit on consumers?

A tight liquidity condition could lead to a rise in the government securities yields and subsequently lead to a rise in interest rates for consumers too.