Liquidity Shrinks, Interest Rates Likely to Go Up

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  • After demonetization, for the first time liquidity is shrinking and it is expected that the interest rate may go up.
  • The interest rate reduced at the time of demonetization as there was rapid increase in cash in Banks.
  • RBI has lent money to Banks due to shortage of cash for the first time after demonetization.
  • There was no such problem in the first three quarters of 2017 as there was incredible increase in cash of banks.
  • Now the shortage of cash noticed after a fall out of advance tax outflows from banks, resulting into a cash squeeze.
  • Due to drop down in liquidity, the 10 year bonds rose to 7.25 % and long term home loans will be available at 8.35%.
  • Currency in Circulation is rising continuously and it rose to Rs 16.9 Lakh Crores for the fortnight ended December 15, 2017, up from Rs 16.8 Lakh Crores in the previous fortnight which resulted in shortage of cash in Banks.
  • Another reason for interest hike is increasing demand for Banks loans after demonetization.

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