Surplus liquidity in banking drops 43% due to advance tax payments

“Liquidity in the banking system is the difference between incremental credit and deposits. The current fall in (surplus) liquidity is a case of deposits coming down because of advance tax payments,” said Madan Sabnavis, Chief Economist, Bank of Baroda. He said companies have drawn their deposits to pay advance tax.

Corporates or individuals are required to pay advance tax if their estimated tax liability, or the amount of tax to be paid, for the year is Rs 10,000 or more. However, an individual not having any income from a business or profession is not liable to pay advance tax. The advance tax is paid in four different installments, with the first on June 15.

The recent finance ministry data showed that the net direct tax collections grew 11.18 per cent to Rs 3,79,760 crore till June 17 in the current financial year. This growth was boosted by the first installment of advance tax payments. The Centre’s advance direct tax collections for the April-June quarter from companies, limited liability partnerships (LLPs) and individuals rose 13.7 per cent to Rs 1,16,776 crore, data showed. The advance tax collections for April-June 2023-24 included corporation tax of Rs 92,784 crore and personal income tax of Rs 23,991 crore. The net surplus liquidity in the banking system had touched a recent high of Rs 2.6 lakh crore on June 4 on account of the deposit of Rs 2,000 notes withdrawn from circulation on May 19. The legal tender status of these notes, however, continues to remain.

After peaking at Rs 2.6 lakh crore, the excess liquidity in the system liquidity dropped to Rs 1.58 lakh crore on June 15 as the RBI also absorbed the surplus money through the standing deposit facility (SDF) and reverse repo windows. SDF was introduced by the RBI in April 2022 as an additional tool for absorbing liquidity from the system without any collateral.

Experts believe that the surplus liquidity situation is likely to be volatile till the end of the month on account of goods and services tax (GST) payments.