RBI Urged to Bridge Widening Liquidity Gap: Report

A Union Bank of India report highlights a growing gap between credit and deposit growth, urging the Reserve Bank of India to implement further measures to boost liquidity. As credit growth outpaces deposits, the banking system faces increased liquidity needs, influenced by foreign exchange outflows and currency leakage.

A report by the Union Bank of India calls for the Reserve Bank of India (RBI) to implement additional measures to bolster liquidity as the credit-deposit growth gap widens. The report indicates that, as of January 10, 2025, credit is growing at 11.5%, surpassing the 10.8% deposit growth, thereby straining the banking sector's resources. The disparity highlights increased demands on banks to fulfill rising loan demands.

The analysis further reveals that the core liquidity deficit, excluding government balances, stood at Rs 53,000 crore as of January 17, 2025. This deficit contrasts sharply with the Rs 2.3 lakh crore surplus observed at the end of March 2024. The liquidity drain is largely attributed to foreign exchange outflows and seasonal currency leakage. From the current financial year, FX outflows have reached Rs 4.3 lakh crore, exacerbated by an additional Rs 5 lakh crore since September 2024.

Overall liquidity concerns are compounded by anticipated currency leakage, projected to reach Rs 1.5 lakh crore by March 2025. While the RBI has enacted various steps to mitigate liquidity pressures, further actions hinge on international trends and FX flows. The Union Bank report cautions against another Cash Reserve Ratio (CRR) cut, as previous measures have sufficiently addressed the liquidity crunch. Instead, a phased 50 basis point rate cut is proposed, potentially in February and April 2025.

(With inputs from agencies.)