Relief Expected for Banks as New Government Takes Office

As the new government gets ready to start its term, banks are hopeful for some relief from the recent tight liquidity conditions. Last month, banks struggled with significant cash shortages because of reduced government spending and outflows related to the goods and services tax.

To help cash-strapped banks, the Reserve Bank of India (RBI) injected almost Rs 9 lakh crore into the banking system through 11 Variable Rate Repo (VRR) auctions in May. This was the highest amount infused in the current year.

During the general elections, government spending was limited by the model code of conduct. Now that the elections are over, it is expected that government spending will increase once the new government takes charge, likely starting from the second week of the month.

The cash shortage in banks was largely due to increased cash circulation during the elections, mainly because of political parties’ spending. With the elections concluded, it’s anticipated that cash circulation will decrease, and funds will return to the banking system.

Earlier this year, in February, banks also faced a cash squeeze, which led the central bank to conduct seven VRRs and infuse Rs 7.5 lakh crore. April saw some improvement, with occasional surpluses providing some relief to the banks.

Repo auctions, which are conducted by the central bank, play a key role in injecting liquidity into the banking system.