The Mahakumbh has led to an inadvertent cash leakage in the system and a significant part of the money may not come back into the system as deposits, said SBI Economic Research in a report on Tuesday. Around ？1 trillion would be needed by March to keep the systemic liquidity just in equilibrium, it added.

       “…there is now inadvertent cash leakage because of Mahakumbh. In Mahakumbh, the withdrawal has been largely by retail depositors whereas the accretion of fresh deposits has been with non-retail participants and hence a significant part of the money may not come back to systemic deposits,” the report stated.

       It also highlighted that with daily FPI outflow of significant amounts and the maturing of forward transactions within 1/2/3 month, the RBI will need to infuse further liquidity.

       Currently, system liquidity is at a deficit of ？1.6 trillion.

       “We believe around ？1 trillion more will be needed by March to keep the systemic liquidity just in equilibrium,” the report stated.

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       RBI’s active intervention in the foreign exchange market has weighed on banking system liquidity. The RBI has been injecting liquidity into the system through various measures, including variable rate repo (VRR) auctions, open market operations (OMOs), and USD/INR buy-sell swap auctions.

       According to the report, RBI’s recent swap of $10 billion (largest so far) has calmed frayed nerves of market participants, indicating that the central bank is willing to walk the extra mile to restore sanity, infusing long-term liquidity, while keeping the cost dynamics in mind.

       “It should also help corporates in better ALM management even as more bilateral swaps of longer duration could be considered to shore up reserves and release liquidity to counter the stress,” the report said.

       Additionally, the report stated that the RBI could look into using cash reserve ratio (CRR) more as a regulatory intervention tool / countercyclical liquidity buffer rather than as a liquidity tool in future.

       “There is an urgent need to revisit the existing liquidity management framework by RBI by replacing the weighted average call rate (WACR) as a policy rate as it does not serve the intended purpose,” the report said.

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