RBI injects Rs 5,100 cr via repo auction

It's now confirmed that liquidity in the banking system is under stress.

Exactly after a year, the Reserve Bank of India (RBI) today injected liquidity into the system on a large scale.

RBI said it infused Rs 5,175 crore through the repo auction, as reverse repo outstandings dropped to just Rs 2,005 crore from over Rs 20,000 crore at the end of October 2005.

The reverse repo window is used by RBI to suck excess liquidity in the system offering 5.25 per cent interest. Banks avail of liquidity through the repo window at 6.25 per cent.

The first time RBI stepped in to inject liquidity into the system since November 2004 was in September 2005, but it was a small infusion of Rs 70 crore.

RBI had also cancelled the Rs 500 crore auction under the market stabilisation scheme (MSS) yesterday given the tight liquidity conditions.

The inter-bank call money rate also rose to 6.50 per cent in early trade from the previous close of 6.40 per cent as traders were in a virtual scramble to meet their reserve requirements as banks have to file fortnightly returns with RBI tomorrow. The call rates closed at 6.00 per cent. When there is adequate liquidity, call rates trade around the reverse repo rate of 5.25 per cent.

Both, public and private sector banks have also been redeeming their mutual fund investments over the past one month to bridge liquidity shortages. Traders have been grappling with dwindling cash surpluses after banks lent more to companies to help pay annual Diwali bonuses to staff.

Further this week, the market has witnessed an outflow of Rs 8,000 crore on account of fresh issuances as a part of the government's regular market borrowing programme, which exerted further strain on liquidity.

The reverse repo balances aggregated to around Rs 15,000 crore on November 10, 2004, when the RBI had infused liquidity of Rs 7,080 crore.

Traders said the cancellation of MSS auction yesterday was unlikely to improve the tight funds position. The cancellation came as RBI deputy governor Rakesh Mohan said liquidity in the banking system was not an issue and that the central bank could use the market stabilisation scheme (MSS) to manage it.