The liquidity deficit in the banking system shrank to about ₹1.40-lakh crore on February 4 from the recent peak of ₹3.46-lakh crore (on January 24th) in view of the government stepping up spending, per RBI data.

The declining liquidity deficit also had a salubrious effect on the overnight money market rates, with the weighted average rate easing to 6.33 per cent from around 6.50 per cent to 6.75 per cent last month.

The Reserve Bank of India (RBI) has been keeping liquidity tight in the banking system in tune with the “withdrawal of accommodation” monetary policy stance to ensure that inflation progressively aligns with the target while supporting growth.

V Rama Chandra Reddy, Head of Treasury, Karur Vysya Bank, attributed the reduction in liquidity deficit to the government releasing contract payments, salaries, etc. in the first week of February.

However, the liquidity deficit could increase to ₹2-lakh crore-₹2.5-lakh crore as there will be outflows from the banking system due to GST payments in mid-February.

RBI Governor Shaktikanta Das, in his December 2023 monetary policy statement, noted that the evolution of liquidity conditions has been in alignment with the monetary policy stance.

“Going forward, government spending is likely to further ease liquidity conditions. On our part, the Reserve Bank will remain nimble in liquidity management,” he then said.