Let’s get Numerical: What is the current Liquidity Deficit?

 I want to calculate the Liquidity Deficit in the Indian banking system at this very instant. Of course, by “this very instant” I mean the 11th of Feb, the most recent day for which I have data available from the RBI’s Money Market Operations (MMO) bulletin. I’ve pasted below a snapshot of this data.

(To understand what liquidity deficit means, read my previous post Liquidity in the Indian Banking System: An Introduction.)

RBI's Money Market Operations on 11-2-2016

Total Liquidity Deficit = Total Repo volumes (fixed rate + variable rate*) - Total Reverse Repo volumes (fixed rate + variable rate*) + Marginal Standing Facility amount + Standing Liquidity Facility amount.

* Variable rate auctions are usually conducted for term Repos and term Reverse Repos. By “term” I mean Repos/ Reverse Repos with a tenor of > than 1 day. 

Note: The formula given above includes Repos and Reverse Repos of all tenors i.e. not only includes term Repos and term Reverse Repos executed on the day in question (11/2), but also those executed earlier and still outstanding since these are still adding/absorbing liquidity from the system. 

So, using the formula given above, the total Liquidity Deficit on 11/2 was = Rs. 1,795 Billion. 

Great. But what does this number mean as a % of the Net Demand and Time Liabilities (NDTL) of the banking system?

(Read my posts, CRR: How to calculate Net Demand and Time Liabilities (NDTL) – the Theory and Calculating NDTL & CRR – in Practice to understand what NDTL means and how it is calculated). 

As you can see from the RBI operations snapshot above, the “average daily Cash Reserve Requirement (CRR) for the fortnight ending 19th Feb" is Rs. 3,788 Billion. Since CRR (4% currently) is maintained on the NDTL of the reporting Friday of the second preceding fortnight, Rs. 3,788 Billion is = 4% of NDTL as on Jan 22nd. This means that the NDTL of the banking system as on Jan 22nd was = 3,788/0.04 = Rs. 94,705 Billion. 

1,795/ 94,705 = 1.9%. The current Liquidity Deficit is therefore = 1.9% of NDTL. This is almost double the 1% (of NDTL) limit that the RBI is comfortable with as far as liquidity shortages in the banking system are concerned.