Liquidity in the banking system has slipped into a deficit after nearly three months, driven by outflows related to quarterly advance tax payments. The due date for GST payments being on the 20th, the deficit is likely to persist for the next couple of weeks.
In a bid to provide relief to banks, the Reserve Bank of India (RBI) on Thursday announced conducting a variable rate repo (VRR) auction of Rs 25,000 crore on Friday.
“With Friday’s VRR auction, the RBI wants to ensure enough liquidity in the banking system,” the treasury head of a public sector bank told FE. “More such auctions cannot be ruled out next week.”
After staying surplus for around three months, liquidity in the banking system has returned to deficit this week. The banking system witnessed a deficit of nearly Rs 5,000 crore on September 17 and Rs 2,600 crore on September 18, from a surplus of Rs 1.35 lakh crore on September 15. During the first half of the current month, the banking surplus remained in the range of Rs 1.35 lakh crore to Rs 2.5 lakh crore. The banking system faced a similar magnitude of deficit in July, August and the last week of June.
“The deficit is temporary and is mainly due to advance tax payments. The situation should improve from the next month,” said Madan Sabnavis, chief economist, Bank of Baroda.
With liquidity swinging from surplus to deficit, the central bank has also stepped up its efforts to infuse short-term funds into the system. The RBI conducted a VRR auction of Rs 1 lakh crore on September 17, during which banks borrowed Rs 82,630 crore.
The RBI conducts a repo auction to inject liquidity into the banking system. Banks can obtain liquidity overnight through RBI’s marginal standing facility when interbank liquidity dries up.