By Christina Titus
The liquidity in the banking system hit Rs 3 lakh crore on Tuesday – a three-year high – due to the Reserve Bank of India’s (RBI) consistent liquidity injection measures and government’s month-end spending estimated around Rs 1 lakh crore, said market participants.
“Between December and May, the RBI has infused Rs 8.6 lakh crore of durable liquidity. In addition, the usual month-end spending by the government along with the beginning of a gradual trickle-down impact of the record high surplus transfer also played a supportive role,” said Vivek Kumar, economist, QuantEco Research.
Going ahead, market participants expect the liquidity surplus to improve. “The RBI has transferred a dividend of Rs 2.69 lakh crore to the government, which is expected to be spent in a phased manner. In addition, government is conducting a buyback of government securities worth Rs 25,000 crore this week,” VRC Reddy, head treasury, Karur Vysya Bank, said.
The banking system fell into deficit of Rs 3.46 lakh crore on January 24 on account RBI’s forex intervention and tax outflows. Things started improving after RBI used various tools at its disposal, including CRR cut, variable rate repo auctions, USD/INR swaps, and open market operations. The liquidity surplus averaged to Rs 1.77 lakh crore in the month of May and Rs 2.70 lakh crore in June.
Though the response to VRR auctions have been tepid in recent times, the RBI is still continuing it. For example, banks bid for only 20% of the VRR auction amount of Rs 25,000 crore on Tuesday. Market participants are of the view that the banking regulator may discontinue daily variable rate repo auction as liquidity is ample in the system.
Earlier, RBI Governor Sanjay Malhotra in his April policy had said that it will ensure sufficient liquidity in the system and is looking at a comfortable level of 1% of net demand and time liabilities (NDTL). After crossing Rs 3 lakh crore, the system liquidity is at 1.3% of NDTL.
“With increased government spending expected towards the month end, the surplus is likely to rise further, potentially exceeding Rs 4 lakh crore,” Reddy added.
Banks parked Rs 3.14 lakh crore at the RBI’s Standing Deposit Facility, the central bank data showed. They received large amount from government’s month-end spending, which they are parking at SDF and some are also taking advantage of arbitrage trade between tri-party repo market and SDF facility, dealers said.
Market participants will keenly watch the Monetary Policy Committee outcome, which is scheduled to announce on Friday and the governor’s commentary on liquidity.