MUMBAI: Muted government spending and high election-related spending have created a liquidity deficit of Rs 70,000 crore in the banking system, stymieing the Reserve Bank of India's record liquidity infusion via bond purchases and the innovative dollar-rupee swap, blunting the recent rate cut and clogging the efficacy of policy transmission.“System liquidity seems to be slightly more in deficit that is normal at this time of the year,” said Saugata Bhattacharya, chief economist at Axis Bank. “The proximate reason seems to be relatively high government balances with RBI , which might be due to lower spends. Similar dollar auction will also be carried out on Tuesday to infuse similar quantum.“RBI might have to infuse liquidity through term repo for the time being,” said Soumyajit Niyogi, associate director, India Ratings. “Post elections, the scenario is likely to change with the spending spree ebbing and possible reduction in cash in circulation.”Factors like ongoing weekly high central and state government bond auctions too added to the deficit problem, Niyogi said. On an average the central bank has sold about Rs 20,000-30,000 crore state and central government debt in the first two weeks in April.Liquidity conditions, however, should improve in the coming days amidst the FX swap and a pick-up in government spending.

Source: Economic Times April 20, 2019 00:45 UTC