For the first time since the start of this financial year, liquidity in the banking system has turned to surplus mode, as banks garnered deposits towards the end of the second quarter. Most banks have parked funds worth Rs 41,530 crore with the Reserve Bank of India (RBI) in the last two days under the liquidity adjustment facility (LAF). However, there were no repo borrowings under LAF on Wednesday.
Barring the first week of April, the liquidity deficit has been roughly in the range of Rs 20,000 crore to Rs 1 lakh crore. Repo borrowings under LAF had gone above Rs 1 lakh crore in mid-September, as companies withdrew to make advance tax payments. “Better liquidity reflects that the money has found its way back in to the system,” said the treasury official of a large public sector bank.
Bankers also attribute the easing in liquidity to better deposit accretion. “Usually, banks resort to shore up balances towards the quarter-end to meet business targets,” said an official of a Mumbai-based public sector bank. Also, there were no government borrowings in the last fortnight, leaving banks with unused funds.
Another factor that has contributed to better liquidity is the ongoing festive season. “It is the start of the month that is lined up with festivities and people would have got advances or bonuses for the same,” said the senior banker. Typically balances improve as people receive salaries in the first week of the month, he added.
Also, this week is the second week of the reporting fortnight and banks tend to cover reserve needs in the first week itself. “This (better liquidity) could be because of earlier product build-up by banks in order to avoid a last-minute rush before the end of reporting fortnight,” said T S Srinivasan, general manager-treasury, Indian Overseas Bank. The interbank call money rate that was trading below repo rate, on Wednesday ended at 7.50 per cent, reflecting availability of surplus funds in the system.
Another banker said that in the backdrop of weak equities, foreign funds have been buying dollar lately thereby increasing rupee liquidity in the system.
However, the surplus mode is temporary and liquidity will soon turn to deficit mode in the next fortnight. Government borrowing for the second half for the current financial year resumes this week as RBI will auction Rs 15,000 crore of dated securities.