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Banking system liquidity hits 3-year high at $3.74 trillion: RBI data
The recent improvement in banking system liquidity can largely be attributed to higher government spending and lower-than-expected goods and services tax (GST) collections, which have eased the usual liquidity pressures. As a result, the liquidity drain was not as sharp as anticipated, dealers said, adding that with RBI already having reduced the Cash Reserve Ratio (CRR), its room for deploying other measures for liquidity withdrawal apart from variable rate reverse repo (VRRR) auction is limited.
Further, they said RBI is expected to stick to shorter-tenure VRRR operations so that durable liquidity is not impacted as the regulator is aiming at improving monetary transmission following 100 bps repo rate cut in quick succession.
Banks are also unlikely to participate in longer-term VRRRs, as they prefer maintaining flexibility amid fluctuating cash requirements. This makes long-duration liquidity absorption tools less practical in the current environment.
'The main reason behind the liquidity improvement is government expenditure and less GST collections, so the drain of liquidity was not as much as expected. Given that the RBI has cut CRR, they can't deploy any other measure right now apart from VRRR. They will go with shorter tenure VRRR as to not overlap with GST outflows. And banks would not want to park their funds for a longer period, so long term VRRR is also not feasible,' said Indranil Pan, chief economist at YES Bank.
The surplus liquidity has kept the overnight weighted average call rate near the Standing Deposit Facility (SDF) rate of 5.25 per cent and below the repo rate of 5.50 per cent. On Thursday, the weighted average call rate – the operating target of the monetary policy – was at 5.27 per cent.
Market participants said that the central bank is expected to roll over the seven-day VRRR auction maturing on Friday. The RBI had received bids worth ₹84,975 crore at the VRRR auction, against the notified amount of ₹1 trillion.
'They might increase the quantum, but seven-day tenure seems reasonable,' said a dealer at a state-owned bank. 'We will have to watch what their next step would be, but they will roll-over the amount on Friday,' he added.
Since the start of the current calendar year, the RBI has been actively infusing liquidity in the banking system via variable rate repo (VRR) auctions, swaps, and open market operations. The RBI introduced daily VRR auctions in response to liquidity tightness stemming from tax outflows and foreign exchange interventions, which was withdrawn on June 9.
Since January, the RBI has injected around ₹9.5 trillion of durable liquidity into the banking system. This infusion helped shift liquidity conditions from a sustained deficit since mid-December to a surplus by March-end. Of the total liquidity injection, ₹5.2 trillion came through open market purchases (including secondary market purchases), while long term VRR auctions and $/₹ buy-sell swaps added ₹2.1 trillion and ₹2.2 trillion, respectively.
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