Quick Edit | Signs of tighter liquidity

Quick Edit | Signs of tighter liquidity

The amount of money that banks parked with the Reserve Bank of India (RBI) plummeted on Tuesday and Wednesday, to Rs61,090 crore and Rs59,435 crore, respectively, the lowest numbers seen in the current fiscal and far lower than the approximately Rs1 trillion of overnight money that funds-flush banks have been parking with the central bank over this period.

The fact that banks are parking less money with RBI means that they are perhaps using the money they have in deposit accounts for other purposes, such as buying government bonds or lending to companies and consumers. The other possibility is that companies have withdrawn money from banks to pay higher advance taxes.

So, it is too soon to announce a new momentum in bank credit. Annual bank credit growth as of 21 November was a mere 11.5%, compared with 30%-plus growth in the boom years.

It is well known that bank credit growth usually lags economic growth. Yet, we should look out for signs of tighter liquidity.