In view of the liquidity crunch that banks have been facing for the last few months, particularly in March, the State Bank of India (SBI) – the country’s largest lender – had demanded that the government’s cash balances to be kept with the lenders and not with the Reserve Bank of India (RBI).

With government curtailing its spending towards the end of the last financial year, its cash balances with RBI had gone up. Bankers estimate the liquidity deficit in the system in March was over Rs.two lakh crore, mainly on account of lack of government spending, and the deficit was higher than the comfort level of RBI which is around Rs.75,000 crore.

“We expect RBI to address the issues of systemic liquidity. Currently, the issue of high volatility in currency holdings of public (both in the form of cash and jewellery) as well as Government’s cash balances with RBI is leading to volatility in system liquidity,” Arundhati Bhattacharya, chairman SBI said in a statement. RBI will review the monetary policy on Tuesday, 5 April.

“To this end, government’s cash balances may be placed with public sector banks, instead of with RBI, so that the cash remains within the banking system and does not create unnecessary volatility in money markets. Such an action will provide a clear picture of the money available within the system which will not get distorted by government borrowing,” Ms Bhattacharya added.

She further said theif government keeps its cash with banks, then, it can earn interest which the banks will offer. RBI offers no interest to the government for keeping its cash. The central bank is aware of the liquidity shortage and infused funds in the banking system by purchasing bonds through open market operations. Still, short terms rates hardened in March, with the overnight rates becoming volatile as it spiked during the early hours of trade while dipping sharply in the closing hours. SBI has also urged that the central bank should also examine why the currency holdings with public has increased so much.