The Financial Currents Shaping India: Liquidity and Remittances
March 20, 2025, 3:37 pm
In the vast ocean of finance, currents shift and change. Recently, two significant waves have emerged in India’s economic landscape: the Reserve Bank of India’s (RBI) liquidity measures and the evolving remittance patterns from abroad. Both phenomena reflect deeper trends in the economy, showcasing resilience and adaptation.
The RBI has been busy. Over the last two months, it injected approximately ₹15.5 lakh crore into the banking system. This move aims to alleviate a funds crunch and stimulate credit growth. Think of it as a lifeline thrown to a struggling swimmer. The liquidity situation tightened due to several factors. The RBI intervened in the foreign exchange market, selling dollars to stabilize the rupee. This action, while necessary, drained rupee liquidity from the system. Additionally, government tax flows and foreign portfolio investor (FPI) outflows added to the strain.
In the first quarter of FY25, the RBI’s actions included around ₹5.5 lakh crore of durable liquidity through open market operations (OMO), variable repo rate (VRR) auctions, and forex swaps. Each tool serves a purpose. OMO purchases involve the RBI buying government securities from banks, infusing long-term liquidity. VRR auctions allow banks to use government securities as collateral for short-term funds. Forex swaps enable banks to sell dollars to the RBI, receiving rupees in return, thus managing liquidity needs.
Despite these efforts, the banking system faced a liquidity deficit. This deficit peaked at ₹3.15 lakh crore in late January. By mid-March, it had reduced to ₹2.26 lakh crore. The RBI’s measures helped moderate this deficit, but the situation remains delicate. The average daily net injection under the liquidity adjustment facility (LAF) was ₹1.41 lakh crore from mid-February to mid-March, down from ₹1.92 lakh crore in the previous month.
Interestingly, while the liquidity deficit persists, banks have increased their placements under the standing deposit facility (SDF). This suggests a paradox: banks are holding onto cash while also seeking to manage their liquidity needs. It’s like a tightrope walker balancing between caution and opportunity.
Meanwhile, another significant trend is unfolding in the realm of remittances. A recent RBI survey reveals a notable shift in the sources of inward remittances. The United States has overtaken the United Arab Emirates as the top source of remittances to India. In 2023-24, the US accounted for 27.7% of remittances, while the UAE contributed 19.2%. This marks a significant change from previous years when the UAE held the top position.
The demographic of Indian migrants is evolving. More skilled professionals are moving abroad, particularly to advanced economies. The survey indicates that the US, UK, Singapore, Canada, and Australia now account for over half of India’s remittances. In contrast, Gulf Cooperation Council (GCC) nations, once dominant, now hold a smaller share. In 2016-17, GCC countries contributed 46.7% of remittances; by 2023-24, this figure had dropped to 37.9%.
The nature of employment also differs significantly between these regions. In the UAE, many Indian migrants work in blue-collar jobs, primarily in construction and hospitality. Conversely, in the US, a staggering 78% of Indian migrants are engaged in high-earning white-collar professions. This disparity explains why remittances from the US are higher, despite a smaller number of migrants.
The states receiving these remittances are also changing. Maharashtra has overtaken Kerala as the top recipient state, reflecting shifting migration patterns. Kerala, once the leader, now ranks second, while Tamil Nadu has also increased its share. This evolution highlights the dynamic nature of migration and economic contributions across India.
As remittances continue to rise, they are projected to reach around US$ 160 billion by 2029. This growth is fueled by digitalization, which has made sending money home easier and cheaper. In 2023-24, 73.5% of remittances were sent through digital channels, showcasing a shift towards more efficient methods.
The RBI’s survey, based on extensive data from banks and money transfer operators, underscores the importance of remittances in India’s economy. They not only provide financial support to families but also contribute significantly to the country’s foreign exchange reserves.
In conclusion, the currents of liquidity and remittances are reshaping India’s economic landscape. The RBI’s proactive measures aim to stabilize the banking system, while the evolving remittance patterns reflect broader migration trends. Together, these elements paint a picture of an economy in transition, adapting to new realities while navigating the challenges ahead. As India moves forward, these financial currents will continue to play a crucial role in shaping its future.
The RBI has been busy. Over the last two months, it injected approximately ₹15.5 lakh crore into the banking system. This move aims to alleviate a funds crunch and stimulate credit growth. Think of it as a lifeline thrown to a struggling swimmer. The liquidity situation tightened due to several factors. The RBI intervened in the foreign exchange market, selling dollars to stabilize the rupee. This action, while necessary, drained rupee liquidity from the system. Additionally, government tax flows and foreign portfolio investor (FPI) outflows added to the strain.
In the first quarter of FY25, the RBI’s actions included around ₹5.5 lakh crore of durable liquidity through open market operations (OMO), variable repo rate (VRR) auctions, and forex swaps. Each tool serves a purpose. OMO purchases involve the RBI buying government securities from banks, infusing long-term liquidity. VRR auctions allow banks to use government securities as collateral for short-term funds. Forex swaps enable banks to sell dollars to the RBI, receiving rupees in return, thus managing liquidity needs.
Despite these efforts, the banking system faced a liquidity deficit. This deficit peaked at ₹3.15 lakh crore in late January. By mid-March, it had reduced to ₹2.26 lakh crore. The RBI’s measures helped moderate this deficit, but the situation remains delicate. The average daily net injection under the liquidity adjustment facility (LAF) was ₹1.41 lakh crore from mid-February to mid-March, down from ₹1.92 lakh crore in the previous month.
Interestingly, while the liquidity deficit persists, banks have increased their placements under the standing deposit facility (SDF). This suggests a paradox: banks are holding onto cash while also seeking to manage their liquidity needs. It’s like a tightrope walker balancing between caution and opportunity.
Meanwhile, another significant trend is unfolding in the realm of remittances. A recent RBI survey reveals a notable shift in the sources of inward remittances. The United States has overtaken the United Arab Emirates as the top source of remittances to India. In 2023-24, the US accounted for 27.7% of remittances, while the UAE contributed 19.2%. This marks a significant change from previous years when the UAE held the top position.
The demographic of Indian migrants is evolving. More skilled professionals are moving abroad, particularly to advanced economies. The survey indicates that the US, UK, Singapore, Canada, and Australia now account for over half of India’s remittances. In contrast, Gulf Cooperation Council (GCC) nations, once dominant, now hold a smaller share. In 2016-17, GCC countries contributed 46.7% of remittances; by 2023-24, this figure had dropped to 37.9%.
The nature of employment also differs significantly between these regions. In the UAE, many Indian migrants work in blue-collar jobs, primarily in construction and hospitality. Conversely, in the US, a staggering 78% of Indian migrants are engaged in high-earning white-collar professions. This disparity explains why remittances from the US are higher, despite a smaller number of migrants.
The states receiving these remittances are also changing. Maharashtra has overtaken Kerala as the top recipient state, reflecting shifting migration patterns. Kerala, once the leader, now ranks second, while Tamil Nadu has also increased its share. This evolution highlights the dynamic nature of migration and economic contributions across India.
As remittances continue to rise, they are projected to reach around US$ 160 billion by 2029. This growth is fueled by digitalization, which has made sending money home easier and cheaper. In 2023-24, 73.5% of remittances were sent through digital channels, showcasing a shift towards more efficient methods.
The RBI’s survey, based on extensive data from banks and money transfer operators, underscores the importance of remittances in India’s economy. They not only provide financial support to families but also contribute significantly to the country’s foreign exchange reserves.
In conclusion, the currents of liquidity and remittances are reshaping India’s economic landscape. The RBI’s proactive measures aim to stabilize the banking system, while the evolving remittance patterns reflect broader migration trends. Together, these elements paint a picture of an economy in transition, adapting to new realities while navigating the challenges ahead. As India moves forward, these financial currents will continue to play a crucial role in shaping its future.