New Delhi [India], May 20 : India's banking system remained in a liquidity surplus during the week ending May 16, 2025 with average surplus funds amounting to Rs 2.04 lakh crore, according to a recent report by Union Bank of India.
Despite tighter liquidity conditions in recent months, the weighted average call rate (WACR) stood at 5.69 per cent, which is lower than the current repo rate. This indicates the presence of excess funds in the system.
The report said "The banking system remained in surplus for most of the week averaging Rs.2.04 lakh crore".
It also added that as of May 2, 2025, total bank credit rose by 9.9 per cent on a year-on-year basis, while deposits grew slightly faster at 10.0 per cent.
This has led to a narrowing of the gap between credit and deposit growth. In fact, the difference has turned slightly negative, moving from a positive gap of 13 basis points in the previous fortnight to a negative 6 basis points.
The report stated this reflects banks' active efforts to mobilize more deposits in response to earlier tight liquidity conditions.
Meanwhile, the domestic bond market saw a fall in yields. The yield on the 10-year government security (6.79 per cent GS 2034) dropped by 6 basis points over the week to 6.26 per cent. It had earlier risen to 6.3449 per cent before falling to a low of 6.2525 per cent.
The decline in yields is largely due to expectations of a higher dividend transfer from the Reserve Bank of India (RBI), estimated at around Rs 2.5-3.0 lakh crore, and easing consumer price inflation (CPI), which opens up the possibility of future rate cuts.
The RBI recently reviewed its economic capital framework (ECF) and has sought the government's approval to expand the range of its contingent risk buffer (CRB), which could impact the final dividend amount.
Markets are now closely watching for the RBI's dividend announcement, scheduled for May 23, 2025.
The report said that a higher-than-expected dividend could push system liquidity above Rs 6.0 lakh crore. In that case, the likelihood of further open market operations (OMOs) would reduce, as most have already been front-loaded.
Meanwhile, RBI has called a meeting this week to discuss its liquidity management framework. The current framework largely revolves around 14-day repo and reverse repo operations, supported by shorter-tenor tools.
However, recent weeks have seen a consistent omission of the 14-day operations, possibly indicating a shift in the central bank's liquidity management approach.
With the June monetary policy review approaching, this meeting could provide hints about any changes to the RBI's liquidity strategy.
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