BANKING SYSTEM LIQUIDITY

About:

• Liquidity in the banking system refers to readily available cash that banks need to meet short-term business and financial needs.
• On a given day, if the banking system is a net borrower from the RBI under Liquidity Adjustment Facility (LAF), the system liquidity can be said to be in deficit and if the banking system is a net lender to the RBI, the system liquidity can be said to be in surplus.
• The LAF refers to the RBI’s operations through which it injects or absorbs liquidity into or from the banking system.

What has triggered this deficit?

• Economists say that there are various factors over the last few months that have led to the current situation. If an improvement in demand for credit has led to the same, the recent advance tax outflow, which is a quarterly phenomenon, has further aggravated the situation.
• Besides, there is the continuous intervention of the RBI to stem the fall in the rupee against the US dollar.