The liquidity in the banking system has moved to a deficit thanks to a confluence of factors such as higher currency in circulation, goods and services tax (GST) outflows and intervention by the Reserve Bank of India (RBI) in the foreign exchange market.

The liquidity deficit as of October 26 was Rs 80,778 crore, taking into account the maintenance of the cash reserve ratio (CRR). The net liquidity injected from outstanding operations on October 25 was Rs 1.03 trillion.

“The shortage appears to be temporary and the result of currency being pulled out on account of the festive season, GST outflows and some forex market intervention,’ Vivek Kumar, economist, Quantico Research, observed.

The net liquidity injected from outstanding operations, as reported on the RBI website, was Rs 73,296.89 crore, including operations on October 26, while from previous operations, it was Rs 98,372.89 crore.

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Bhaskar Panda, EVP, Overseas Treasury, HDFC Bank, observed that if one considers the government cash balances with the RBI, there is no liquidity deficit. “Government cash balances with the RBI are estimated to be around `4 trillion and we are expecting it to come back to the system soon,” Panda said.

He added that the central bank has been adding liquidity to the system through various instruments.

Sushanta Mohanty, general manager – Treasury, Bank of Baroda, said that while the shortage may be temporary, the RBI clearly wants liquidity to be at a neutral level. “That’s the reason we are at these levels. The central bank will keep a watch on the consumer price inflation prints and act accordingly,” Mohanty observed. He added the markets are comfortable as seen from the overnight call rate of around 6.2%.

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Money market dealers pointed out the weighted average overnight rates had not topped the marginal standing facility (MSF) rate, of 6.15%, by too much on a continuing basis. The RBI has raised the repo rate by 190 basis points since early May, taking the repo rate to 5.9%. At its September 30 meeting, the monetary policy committee (MPC) opted to stay focused focussed on withdrawal of accommodation to rein in inflation while supporting growth.