{"id":153784,"date":"2021-12-16T20:53:49","date_gmt":"2021-12-16T15:23:49","guid":{"rendered":"https:\/\/blog.forumias.com\/?p=153784"},"modified":"2021-12-16T20:53:49","modified_gmt":"2021-12-16T15:23:49","slug":"surplus-liquidity-in-the-system-how-it-came-and-how-it-may-go","status":"publish","type":"post","link":"https:\/\/forumias.com\/blog\/surplus-liquidity-in-the-system-how-it-came-and-how-it-may-go\/","title":{"rendered":"Surplus liquidity in the system: How it came and how it may go"},"content":{"rendered":"\n

News: <\/strong>RBI has pushed excess liquidity into the system. Now, exiting this surplus liquidity scenario of \u20b98 trillion will be a challenge.<\/p>\n

What are the reasons behind surplus liquidity in the system?<\/strong><\/h5>\n

To stimulate growth, various tools were used by RBI during pre-Covid and Post Covid phase to push excess liquidity into the system. For instance,<\/p>\n

– LTRO<\/a><\/span><\/strong> (long term repo operations)<\/p>\n

–<\/strong> OMO<\/a><\/strong><\/span> (open market operations)<\/p>\n

–<\/strong> TLTRO<\/a> <\/strong><\/span>(targeted long-term repo operations)<\/p>\n

–<\/strong> GSAP<\/a><\/strong><\/span> (government securities acquisition programme)<\/p>\n

– RBI\u2019s low repo rate<\/p>\n

– A low CRR (cash reserve ratio)<\/p>\n

As a consequence, liquidity increased. Almost \u20b96-8 trillion of surplus liquidity resides in RBI\u2019s reverse repo window. \u00a0But deployment avenues were limited for a variety of reasons.<\/p>\n\n\n\n
Must Read<\/strong>: Monetary Policy – Basics Simplified<\/span><\/a><\/strong><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n
Why excess liquidity was not utilized?<\/strong><\/h5>\n

First,<\/strong> demand was not strong, with low-capacity utilization rates in most sectors (60-69%) holding back investment.<\/p>\n

Second<\/strong>, private investment in infrastructure hasn\u2019t yet taken off.<\/p>\n

Third,<\/strong> while MSMEs borrowed on the back of the guarantee, the funds were used to repay loans and maintain business rather than for growth.<\/p>\n

Fourth,<\/strong> banks were too picky in terms of new customers, as they had just about come to get bad loans off their books.<\/p>\n

Finally<\/strong>, the precondition on loan performance as of 1 March 2020 meant that stressed units did not qualify.<\/p>\n

Why exiting the surplus liquidity is a challenge for RBI now?<\/strong><\/h5>\n

While the RBI has stopped buying GSAP, it does not address the issue of surplus liquidity. Further, it is difficult for RBI to manipulate the reverse repo window tools as of now.<\/p>\n

Banks are trying to stop deposits by keeping interest rates low. Although this can ensure that surpluses don\u2019t increase, it doesn’t reduce them either.<\/p>\n

Financial markets have not quite reacted positively to surpluses, as government bond yields remain high in relative terms.<\/p>\n

What needs to be done to drain excess liquidity?<\/strong><\/h5>\n

First,<\/strong><\/em> bank credit demand must pick up, with the economy\u2019s investment cycle turning around.<\/p>\n

Second,<\/strong> <\/em>Centre should be borrowing more so that banks automatically channel their surpluses back.<\/p>\n

Third,<\/strong> <\/em>RBI should be going in for some OMO sales to reverse its GSAP effort, so that these securities return to banks.<\/p>\n

Source:<\/strong> This post is based on the article \u201cSurplus liquidity in the system: How it came and how it may go\u201d<\/strong> published in Livemint<\/strong> on 16th<\/sup> Dec<\/strong> 2021<\/strong>.<\/p>\n","protected":false},"excerpt":{"rendered":"

News: RBI has pushed excess liquidity into the system. Now, exiting this surplus liquidity scenario of \u20b98 trillion will be a challenge. What are the reasons behind surplus liquidity in the system? To stimulate growth, various tools were used by RBI during pre-Covid and Post Covid phase to push excess liquidity into the system. For… Continue reading Surplus liquidity in the system: How it came and how it may go<\/span><\/a><\/p>\n","protected":false},"author":10316,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"jetpack_post_was_ever_published":false,"footnotes":""},"categories":[1230,9],"tags":[216,10501],"class_list":["post-153784","post","type-post","status-publish","format-standard","hentry","category-9-pm-daily-articles","category-public","tag-gs-paper-3","tag-live-mint","entry"],"jetpack_featured_media_url":"","views":{"total":0,"cached_at":"","cached_date":1704789681},"jetpack_sharing_enabled":true,"_links":{"self":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/153784","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/users\/10316"}],"replies":[{"embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/comments?post=153784"}],"version-history":[{"count":0,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/posts\/153784\/revisions"}],"wp:attachment":[{"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/media?parent=153784"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/categories?post=153784"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/forumias.com\/blog\/wp-json\/wp\/v2\/tags?post=153784"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}