Liquidity in the banking system slipped into deficit on Monday after two months, primarily because of outflows due to goods and services tax (GST) payments. Market participants said the Reserve Bank of India (RBI)’s active intervention in the forex market to defend the falling rupee also weighed on liquidity conditions.
On Monday, the liquidity was in a deficit of Rs 6,956.24 crore, compared with a surplus of Rs 28,203.76 crore on Friday, according to the money market operations data of the RBI. In the last couple of months, there has been a surplus in liquidity to the tune of Rs 1.5-2 lakh crore.
Industry players said around Rs 1.6-1.8 lakh crore went out of the banking system on account of GST payments, pushing banking liquidity into deficit. Additionally, RBI’s active intervention in the forex market has also weighed on the liquidity, said market participants.
“Combination of GST outflows, G-Sec payments (securities that were auctioned on Friday) and selling from the RBI absorbed the surplus liquidity. Deficit will be moderated once the government month-end spending starts,” said a call dealer with a private bank.
Amid need for funds, the weighted average call rate has been hovering around 6.70-6.80% for the last two days, affecting the overnight Mumbai Interbank Offered Rate (MIBOR), the benchmark for other short-term borrowing instruments. This led to the tri-party repo rate to move near the marginal standing facility. On Tuesday, the call rate ended at 6.65%.
To prevent rates from further shooting up, the RBI injected around Rs 75,000 crore through three variable rate repo (VRR) auctions. Banks oversubscribed in all these VRR auctions, which imply towards the shortage of funds in the banking system, said market participants.
On Tuesday, the central bank conducted a three-day VRR for a notified amount of Rs 25,000 crore during which banks borrowed Rs 48,957 crore.
In the current week, banks are expecting more VRRs of around Rs 25,000-50,000 crore as the deficit is likely to stay till the government month-end spending (salaries, pensions, etc) hits the banking system. However, this time, banks are expecting a slowdown compared with previous months.
“Earlier, banks were the only conduit to disburse funds to states from the Centre. But, the RBI now can send directly to states trough single nodal account, which has affected liquidity,” said a dealer with a state-owned bank.