India's Banking System: Surplus Liquidity Amid Market Volatility

India Ratings and Research expresses concerns over volatility in the domestic money market and an undesired tightening of monetary policy. Despite surplus liquidity, high volatility affects banks' loan-to-deposit ratios. Geopolitical risks and uncertain foreign investments heighten market uncertainties, impacting financial stability in India.

India Ratings and Research (Ind-Ra) has highlighted concerns over volatility in the country's domestic money market, despite the overall surplus of liquidity within the banking system. The agency stresses that this volatility could lead to an unintended tightening of monetary policy conditions, raising alarms about the broader economic implications.

Both the equity and money markets have been experiencing significant fluctuations, which pose challenges to commercial banks, particularly in managing loan-to-deposit ratios. Soumyajit Niyogi, Director at Ind-Ra's Core Analytical Group, remarked that such volatility serves as a deterrent for banks in addressing vital financial metrics and pricing strategies.

The issue of loan-to-deposit ratio imbalances has become a focal point of discussion, drawing attention from top financial authorities, including the finance minister and the RBI governor. Although liquidity remained in surplus throughout October 2024, the surplus levels have diminished due to a substantial USD 10 billion outflow from the capital market. Geopolitical factors, as well as uncertainties surrounding global and domestic economic growth, have exacerbated the situation, contributing to volatile foreign portfolio investments.

(With inputs from agencies.)