Why the Liquidity crisis in India?

We are after all not extending credit, NPAs are up only by 1-1.5% at most banks, and we have already released 3 Lac crores ( INR 3 Trillion) thru cuts in CRR, SLR and changes in regulation on secured collateral borrowings. Corporates may be squeezed but where have the interbank market funds gone, as banks are seeing a steady decline in the amounts they have in cash, without any linked repatriation or credit offtake. I think at the maximum only INR 1 Trillion ( tops) would have been reduction in deposits! One component which shd be not all the answer, would be the purchase of Dollars by RBI to shore up the falling rupee.

There is going to be a further CRR cut before December, commentators indicating as much as 150 points, but I think someone should think about getting more out of the SLR which is a largish 25% , 23% with all the current cuts effected and which should provide liquidity against a long stated grouse of the global players.

Banks are thus sitting on a lot of money but with recession prospects firming up in each sector, it is unlikely that credit will roll out anytime soon. A lot of the money should be expected in high yield junk investments yet again and that will remain a matter of concern.

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