Banks are borrowing insane amounts from the RBI, but there is no liquidity problem. If there was a liquidity issue, we would be seeing rate spikes in the overnight CALL and CBLO markets, where the spikes are relatively low.
Here’s the short term borrowingby banks from the RBI. A quick note:
- Fixed rate repo is overnight borrowing at 6.75%
- Variable rate repo is borrowing for specific terms, at rates that are discovered in an auction. (The average rate is on the right most side)
- There are multiple such variable rate repos, so we should add them up
- Eventually we subtract the reverse repo, which is where banks park excess money back with the RBI.
So in total, banks have borrowed about 268,000 cr. or 2.68 trillion rupees from the RBI. Reverse Repo is 25,666 cr. or around 256 billion, so if you net that out, we get 2.43 trillion.
(I’m going to switch to “trillion” as it’s easier to understand with large numbers. One lakh crore = one trillion)
Banks have a total of Rs. 94 trillion in liabilities (deposits etc). And the central bank doesn’t like it when such borrowing from the RBI window exceeds 1% of that amount. Now, it’s about 2.5% of it! But why isn’t RBI worried?
Because the Government Has Rs. 1.9 trillion in Tax Collections Stored With RBI
March 15 was the last date for advance tax and the government has got a lot of money coming in through the tax. Yesterday, the government account with the RBI saw a balance of Rs. 1.9 trillion! 
Now the government has to park this cash with the RBI, and it can’t spend much till March 31 (will only spend in the next financial year). So this liquidity issue, which happens every year in March, is likely to be temporary.
However, the RBI has been trying to fix things. They have bought government bonds in OMO auctions – where the banks will sell the RBI bonds and get money in return. The total amount bought, in March alone, adds up to Rs. 42,000 crores. This gives banks money, and is akin to “permanent” liquidity – where the RBI is actually printing more money to buy bonds. (The RBI can also print more money to buy dollars, and that they haven’t wanted to do recently)
With the government money coming back into play post 31 March, any liquidity issues will get sorted out and the massive borrowing by banks may only last a month or so more.
Liquidity is flooding Global Markets, But India’s Worried About Inflation
World Central bankers are on a tear, providing insane amounts of liquidity into their own markets. There is so much money flooding the markets that it would indeed be strange to see Indian banks struggling for money – and the real reason is that massive government account. This will get worse, as the government collects more tax (VAT, Excise, etc) towards the end of the month.
But printing money, like the RBI has done, is going to impact inflation in the future. And this is something that worries the RBI. Other countries print because they want inflation. India has too much of it. In the end, inflation is a monetary thing; and printing money has in the past been disastrous for us.
