Liquidity continues to be in deficit, banks expect RBI repo auction

Liquidity in system went into deficit mode on Tuesday for the first time in this Financial Year

The banking system’s liquidity deficit persisted on Wednesday due to the Reserve Bank of India’s (RBI) move to withhold a significant portion of banks’ surplus funds. This was aimed at curbing inflationary pressure and has resulted in insufficient availability of cash, exacerbated by the outflow of taxes.

Liquidity in the banking system went into deficit mode on Tuesday for the first time in the current financial year.

According to RBI data, the central bank had injected Rs 15,552 crore on Tuesday and Rs 23,644 crore on Monday.

Consequently, the weighted average call rate, and tri-party repo rate have largely remained above the repo rate after August 11. They settled at 6.76 per cent, and 6.75 per cent, respectively.

The imposition of incremental cash reserve ratio (I-CRR) by the RBI, coupled with outflows on account of goods and services tax (GST) payments starting this week weighed on the liquidity in the banking system.

Moreover, the RBI has been intervening in the foreign exchange market to protect the rupee from depreciating further. 

Market participants estimate a total outflow worth Rs 1.5 trillion due to GST payments. Additionally, imposition of I-CRR is expected to result in the RBI impounding more than Rs 1 trillion.

“The neutral level of liquidity is around Rs 65,000-70,000 crore. Only to maintain real-time gross settlement (RTGS) or any funds transfer, a bank has to maintain at least Rs 75,000 crore excess liquidity, more than the CRR requirement. So, a bank cannot fund it by borrowing at 6.75- 6.77 per cent continuously. So, Rs 1-1.5 trillion of banking liquidity is a must,” a dealer at a state-owned bank said.

“We thought the RBI will come out with a notification regarding repo auction, but it hasn’t till now,” he added. 

Market participants expect the RBI to conduct variable rate repo (VRR) auctions as a measure to inject liquidity into the system.

In response to surplus liquidity exceeding Rs 2 trillion, the central bank had previously conducted a series of variable rate reverse repo (VRRR) auctions to withdraw excess funds.

Notably, the most recent VRRR auction was a 14-day one worth Rs 1 trillion, on August 11.

Banks parked only Rs 34,139 crore against the notified amount at a weighted average rate of 6.49 per cent. However, subsequent to the auction, the RBI has not notified about any such auctions for the last two weeks.