India’s Banking System Faces Volatility Amid Surplus Liquidity
India Ratings and Research (Ind-Ra) has highlighted concerns about the volatility in India’s domestic money market, despite an overall surplus in banking system liquidity. This volatility is causing issues for commercial banks, particularly with loan-to-deposit ratios and asset liability pricing, according to Soumyajit Niyogi, Director of the Core Analytical Group at Ind-Ra.
In recent months, both the finance minister and the RBI governor have discussed the potential risks of the imbalance in loan-to-deposit ratios to financial stability. Although liquidity remained in surplus in October 2024, it has decreased due to a USD 10 billion outflow from the capital market.
Ind-Ra attributes these outflows to rising geopolitical risks, hopes for a revival in the Chinese economy, and a slowdown in India’s growth momentum. The uncertainty in foreign portfolio investments is expected to continue due to these factors.
The October 2024 edition of Ind-Ra’s Credit Market Tracker provides insights into systemic and market liquidity, interest rate transmission, short-term yields, and mutual fund sectoral debt exposure. It also tracks monthly changes in banking system liquidity and trends in debt and money markets.
Doubts Revealed
Volatility -: Volatility means that something is changing a lot and is not stable. In this context, it refers to the banking system having unpredictable changes in the money market.
Surplus Liquidity -: Surplus liquidity means that there is more money available in the banking system than is needed. This can happen when banks have more money to lend than people want to borrow.
India Ratings and Research (Ind-Ra) -: India Ratings and Research is a company that evaluates and gives ratings to financial institutions and markets in India. They help people understand how stable or risky these institutions are.
Loan-to-deposit ratios -: Loan-to-deposit ratio is a measure used by banks to compare the amount of loans given out to the amount of deposits they have. A high ratio means the bank is lending a lot compared to its deposits.
Asset liability pricing -: Asset liability pricing is how banks decide the cost of their loans and the interest they pay on deposits. It helps them manage their money efficiently.
RBI governor -: The RBI governor is the head of the Reserve Bank of India, which is the central bank of the country. The governor helps make important decisions about India’s money and banking policies.
Capital market outflows -: Capital market outflows happen when investors take their money out of a country’s financial markets. This can reduce the amount of money available in the country.
Geopolitical risks -: Geopolitical risks are problems or tensions between countries that can affect the economy. These can include conflicts, trade issues, or political changes.
Credit Market Tracker -: Credit Market Tracker is a tool or report that provides information about the credit market, which includes loans and borrowing activities. It helps people understand trends and changes in the market.