Government spending and maturing government securities have boosted the banking system liquidity, which has touched a four-year high, said market participants.
The system liquidity was at a surplus of Rs 4.57 lakh crore on Wednesday, the highest in four years. It has averaged Rs 3.61 lakh crore so far in April, compared with Rs 1.57 lakh crore in March, according to data from the Reserve Bank of India (RBI). Liquidity was under pressure in March due to tax outflows and RBI’s forex interventions amid the rupee weakness, triggered by the West Asia war.
Government spending boosts system liquidity
“System liquidity has surged due to government spending and G-Sec redemptions. Around Rs 56,000 crore entered the banking system from maturity of 7.27% GS 2026 on April 8,” said Alok Singh, treasury head at CSB Bank.
He said additional maturities of Rs 1.2 lakh crore due on April 12 and 17 will further boost liquidity. “However, upcoming tax outflows and reversal of VRR (variable rate repo) will suck out some liquidity from the system.”
Meanwhile, banks parked Rs 5.78 lakh crore at standing deposit facility on Wednesday, compared to an average of Rs 3.21 lakh crore in March.
Followed by the improved liquidity, the weighted average call rate (WACR) eased to 5.08% on Thursday, from an average of 5.29% in March.
West Asia crisis delays RBI action
Market participants do not anticipate the RBI to deploy variable rate reverse repo auctions despite WACR falling well below the repo rate, given the West Asia crisis. RBI Governor Sanjay Malhotra indicated the same in the post-policy press conference on Wednesday.
“Our attempt is to keep the WACR as near as possible to the policy rate. In times of high uncertainty, we reassure banks that liquidity won’t fall short. That’s why we have allowed it to be in the lower end,” said Malhotra.