RBI Reports Marginal Rise in Cash Balances, Triggers Concerns Over Liquidity and Fiscal Policies

The Reserve Bank of India has released statistical data on Money Market Operations as of December 31, 2024, highlighting a marginal increase of approximately ₹6,547 crore in cash balances held with the RBI. The cash balance as of December 31, 2024, stands at ₹9,41,167.47 crore, compared to ₹9,34,620.45 crore on the same date in the previous year (December 31, 2023).

Implications

The rise in cash balances indicates an excess of liquidity in the economy, prompting the RBI to consider raising interest rates to curb inflation. The substantial cash reserves with the RBI have raised concerns about potential government interference to meet fiscal deficit targets, further intensifying liquidity issues. Public sector banks have strongly appealed to the Finance Ministry, urging that government cash balances be held with them instead of the RBI. Such a move, they argue, could bolster their share of low-cost Current Account and Savings Account (CASA) deposits, which have been steadily declining amid sluggish deposit growth and weakening credit offtake.

In 2021, the Government of India implemented the SNA-SPARSH framework to streamline and monitor funds under Centrally Sponsored Schemes (CSS). Under this framework, government cash balances were mandated to remain with the RBI instead of commercial banks. Bankers have pointed out that this shift has reduced float funds, hampering operational efficiency, increasing deposit costs, and negatively affecting net interest margins.

The current scenario risks triggering a “liquidity trap,” a situation where expansionary monetary policies, such as an increase in money supply, fail to lower interest rates, boost income, or stimulate economic growth. In such cases, monetary policy executed through open market operations becomes ineffective in influencing interest rates or income levels.

Consequences

Amid the prevailing economic challenges, banks have been encouraging individuals to open deposits. In response to the liquidity crunch, banks have also raised interest rates, which has significantly discouraged borrowers from seeking loans due to higher borrowing costs.

While discussing the Financial Stability Report (FSR), the newly appointed Governor of the Reserve Bank of India, Mr. Sanjay Malhotra, emphasized that the Gross Non-Performing Assets (GNPA) or Bad Loans Ratio (BLR) of banks has dropped to 2.6%, the lowest in the last 12 years. This improvement is attributed to declining slippages and steady credit demand.

However, the Governor expressed serious concerns over a sharp rise in loan write-offs among public sector banks, which he attributed to deteriorating asset quality in the unsecured lending segment and diluted underwriting standards.

Team Maverick.