The liquidity deficit was because of the balance of payments turning negative in the ongoing quarter at $23 billion, due to persistent outflows from foreign portfolio investors (FPI) and the RBI selling dollars in the market to support the rupee, economists said.
This also led to the weighted average call rate (WACR) moving 22 basis points higher than the policy repo rate at 6.72% on Monday, pushing up borrowing costs for banks. A higher WACR correspondingly pushes up borrowing costs also for companies raising funds through other debt instruments, such as certificates of deposits and commercial papers.
“This deficit of system liquidity is because balance of payments (BoP) turned negative in Q3FY25, plus a widening trade deficit and rise in FPI outflows since October 2024 resulted in RBI selling dollars (and buying the rupee),” said Gaura Sen Gupta, chief economist at IDFC First bank. “This is also reflected in core liquidity, which has reduced from peak levels. Reduction in core liquidity indicates that system liquidity tightness could persist if BoP outflows persist,” she said.
Core liquidity – system liquidity plus government surplus – reduced from peak surplus of ₹4.6 trillion on September 27 to ₹1.6 trillion on November 15. India’s foreign exchange reserves fell by $17.8 billion in the week ended November 15, to reach a four-month low of $657.9 billion, RBI data showed.
Meanwhile, India’s merchandise trade deficit – the difference between exports and imports – widened to a two-month high of $27.14 billion in October, compared with $20.78 billion in September. Economists also estimate a slowdown in deposit growth and monthly GST payments to have affected the system liquidity.
