Liquidity crunch threatens to delay lending rate cut

Despite RBI's moves, liquidity has stayed in deficit since mid-December

- Shayan Ghosh & Gopika Gopakumar

MUMBAI: The liquidity crunch menacing the banking system will delay lending rate cuts and slow credit growth, lenders cautioned, calling for fresh measures to transmit lower repo rates to cheaper loans.

Three senior bankers told Mint that a reduction of interest rates would not be immediate because of the paucity of liquidity, at a time when lenders were fearful of losing customers and did not want to lower deposit rates. Among several measures, the regulator on Friday announced a three-year dollar swap of $10 billion, barely a month after a six-month swap of $5 billion. It has also conducted open market operations or OMOs and variable rate repo (VRR) auctions to infuse liquidity.

Despite RBI's moves, liquidity has stayed in deficit since mid-December. After peaking at ₹3.3 lakh crore on 23 January, deficit cooled to ₹2.1 lakh crore as on 20 February, Bloomberg data showed.

"The Reserve Bank of India's move to do a rupee swap is a move in the right direction. Another round of similar quantum would be required in a similar or alternative structure," said a top executive at a private sector bank. "Bank credit growth has to pick up to over 13% from the current 11.5% for the economy to pick up pace, and for that, RBI must ensure sufficient liquidity."