Key Highlights:
- Domestic private banks face severe cash shortages, limiting their ability to issue loans.
- Cash crunch linked to Reserve Bank of India’s (RBI) dollar sales to stabilize the rupee and advance tax outflows.
- Rupee hits record low of ₹84.93 against the US dollar; concerns rise over further depreciation.
- RBI’s measures, including a Cash Reserve Ratio (CRR) cut, inject ₹1.16 lakh crore but fail to fully ease the crisis.
- Advance tax payments drain ₹1.4 lakh crore from the banking system, deepening liquidity woes.
New Delhi: A significant cash crunch has gripped India’s domestic private banking sector, posing challenges to their lending operations. The Reserve Bank of India’s (RBI) dollar sales to curb the rupee’s depreciation and advance tax payments by companies have exacerbated the liquidity crisis. Loans across sectors, including home, education, agriculture, corporate, and auto loans, are being severely impacted.
Biggest Banking Cash Crunch in Six Months
According to the Bloomberg Economics Index, the current cash shortage is the most severe in the past six months. On Monday, banks resorted to borrowing heavily from the RBI to manage their short-term liquidity needs. This situation arises as the RBI has been consistently selling dollars since October 2024 to stabilize the rupee, which has led to further depletion of cash reserves in the banking system.
Rupee Weakens to Record Low
The rupee hit a historic low of ₹84.93 against the US dollar on Tuesday, raising concerns over further depreciation. Analysts predict that the rupee could slide below ₹85, driven by increasing trade deficits and the strengthening dollar. This scenario puts additional pressure on the RBI to continue intervening in the forex market, potentially worsening the cash shortage.
RBI’s Measures to Boost Liquidity Fall Short
In an attempt to address the liquidity crunch, the RBI recently reduced the Cash Reserve Ratio (CRR) by 50 basis points, bringing it down from 4.50% to 4.00%. This move infused ₹1.16 lakh crore into the banking system, aiming to facilitate loan disbursements and spur economic growth. However, the ongoing cash drain caused by dollar sales and tax payments has rendered this measure insufficient to stabilize the banking sector.
Advance Tax Payments Drain Banking System
The liquidity crisis has been aggravated by the advance tax payment deadline for the third quarter of the financial year on December 15, 2024. Approximately ₹1.4 lakh crore was withdrawn from the banking system as companies met their tax obligations. This significant outflow has tied the hands of banks, further limiting their ability to lend.
Implications for Loan Availability
The cash shortage is expected to impact multiple sectors dependent on loans. Borrowers seeking home loans, education loans, or corporate financing may face delays or higher interest rates as banks struggle to meet demand. Agriculture and small businesses, which rely heavily on credit, are particularly vulnerable.
What Lies Ahead?
The cash crisis in India’s banking system underscores the delicate balance between stabilizing the rupee and ensuring liquidity in the financial sector. With the rupee’s continued depreciation, the RBI may be forced to sell more dollars, potentially deepening the crisis. Stakeholders are now looking to the central bank for additional interventions to ease the liquidity crunch and ensure credit flow in the economy.
