New Delhi: India’s banking liquidity deficit has jumped to over a four-year high at Rs 1.46 lakh crore on Wednesday, September 20, on account of outflows related to advance tax payments and preparation for goods and services tax (GST) collection, which is a quarterly phenomenon, Reuters reported.According to the report, this is the highest single day shortfall since April 23, 2019. And banking system liquidity had slipped into deficit for the first time this fiscal in August.This also comes after the Reserve Bank of India (RBI) ordered banks to set aside 10% of their incremental deposits – as incremental cash reserve ratio (ICRR) – received between May 19 and July 28.Liquidity deficitIn simple terms, liquidity means how much cash is readily available, or how quickly you can get your hands on your cash. For instance, a five-year fixed deposit’s liquidity is lower than a savings account. But you can take cash out whenever you need from your savings account.Liquidity in the banking system means how much cash is readily available with the banks to meet their short-term business and financial needs.On any given day, if the banking system is a net borrower from the RBI under Liquidity Adjustment Facility (LAF), the system liquidity can be said to be in deficit. In contrast, on any given day, if the banking system is a net lender to the RBI, the system liquidity can be said to be in surplus.An LAF is a tool used in monetary policy, primarily by the Reserve Bank of India (RBI), that allows banks to borrow money through repurchase agreements (repos) or to make loans to the RBI through reverse repo agreements. This maintains the liquidity pressures in the financial markets.Now there’s another distinct tool used by the central bank to manage liquidity in the banking system. Both the tools serve different purposes.While LAF is used for routine liquidity management, Marginal Standing Facility (MSF) is meant for extraordinary situations when banks need funds urgently. The interest rates for MSF are higher, making it a costlier source of funds for banks compared to the LAF.The numbersOn Wednesday, banks borrowed a record Rs 1.97 lakh crore under the MSF and parked around Rs 46,724 crore under a special deposit facility, the Times of India reported.An estimated aggregate outflows of up to Rs 2.50 lakh crore is expected, because the twin outflows (advance tax payments and outflows towards GST) have occurred in the same reporting fortnight, Reuters quoted bankers as saying.And this has happened at a time when a chunk of the money is not available for use as it is blocked in the incremental cash reserve ratio.Moreover, “another drain on rupee liquidity could be from RBI’s FX intervention if depreciation pressures on the rupee persist,” Gaura Sen Gupta, an economist with IDFC First Bank, told Reuters.Traders told Reuters that the winding down the I-CRR, which was imposed on banks in August, is adding to the liquidity tightness.Upasna Bhardwaj, chief economist at Kotak Mahindra Bank, told Reuters that the RBI is expected to keep liquidity tight in the near term in order to keep short-term rates elevated, given the pressure on the rupee and underlying inflationary risks, which may also prevent the central bank from announcing variable repo rate auctions.She added that the liquidity deficit will, narrow towards the end of this month.