Liquidity management in the system is one of the important function of RBI. RBI uses LAF window to either suck or pump liquidity from/in the market. Repo is the rate at which Banks borrow from RBI and Reverse Repo vis-a-versa. Net LAF borrowing (i.e. Repo borrowing amount less Reverse repo lent amount)(lets assume Rs.50) + MSF borrowing(Rs.20) + Term repo(via RBI)(Rs.20) borrowing + borrowing under standing liquidity facility(SLF)(Rs.10) gives one a holistic view over liquidity. Liquidity deficit for above case will be 50+20+20+10 = Rs.100
Now, coming to our topic of core liquidity deficit. Core liquidity deficit is Liquidity deficit calculated using aforesaid calculation less Govt. balance with RBI. Let’s say total borrowing of banks from LAF/MSF/Term Repo/SLF is 100rs and balance of Govt. lying idle with RBI is 20rs than core liquidity deficit will be 80rs(100-20) as Rs.20 is presumed to be back into the system soon by way of Gov. spending. Normally soon after the advance tax outflows systemic liquidity deficit rises but core liquidity deficit is not affected. For e.g. Liquidity deficit before advance tax was 50rs. Now soon after the advance tax payments of Rs.20 liquidity deficit rose to 70rs (50+20). Now we all know this 20rs of advance tax flow will find its way into Government’s account. Hence Core liquidity deficit will be 70rs (liquidity deficit) – 20rs (Govt. balance with RBI) i.e. 50rs.
Actual numbers for advance tax outflows ranges from 400-650Billion depending upon economic activities quarter of payment. During economic boom this number may come at higher level as business activity would have been more whereas during recessionary period amount collected would be comparatively low.
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