New Delhi [India], November 5 : Overall liquidity in the banking system is in surplus, but it is the volatility in the domestic money market that has been a key concern, said India Ratings and Research (Ind-Ra).
The rating agency was concerned about what it termed undesired tightening of monetary policy conditions in the money market.
Both equity and money markets in India have been experiencing a high degree of volatility at present.
"High volatility in the banking system liquidity also acts as a deterrent for commercial banks in terms of addressing adverse loan-to-deposit ratios and asset liability pricing," said Soumyajit Niyogi, Director, Core Analytical Group, India Ratings.
Banks in India are experiencing an imbalance in loan-to-deposit ratios lately. The debate on loan-to-deposit ratio imbalance and its potential risks to financial stability has been raised by even the finance minister and the RBI governor in the recent months.
Domestic banking system liquidity has remained in surplus in October 2024 (until October 29), though the level of surplus in the system has reduced considerably owing to outflows of USD 10 billion from the capital market.
The rising geopolitical risk, increasing hope of revival in the Chinese economy and fading growth momentum in India have become key drivers for outflows from the domestic equity capital market, the rating agency asserted.
It added that the movements in foreign portfolio investments remain uncertain. And the volatility is likely to follow the elevated geopolitical risks and rising uncertainty over the global growth outlook, including India.
India Ratings and Research (Ind-Ra) has published the October 2024 edition of its Credit Market Tracker. The report comments on the systemic and market liquidity with insights on interest rate transmission, short-term yields, and aggregate mutual fund sectoral debt exposure.
The tracker highlights the monthly changes in the liquidity of the banking system and trends in the debt and money markets.
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