As the liquidity deficit deepens further, the Reserve Bank of India (RBI) on Friday conducted its largest variable rate repo (VRR) auction in nearly a year with a notified amount of Rs 2.25 lakh crore. Cash-starved banks submitted bids totalling Rs 2.77 lakh crore, prompting the RBI to conduct a second VRR auction worth Rs 50,000 crore. This follow-up auction, too, received a robust response, with banks placing bids of around Rs 75,000 crore.
The liquidity shortfall, which was around Rs1.4 lakh crore in the first week of January, crossed the Rs 2-lakh-crore mark on Thursday. Banks have requested the RBI to consider several liquidity-easing measures, including a further cut in the cash reserve ratio, amid a surge in borrowing costs, according to sources.
“Liquidity has tightened significantly from the RBI’s forex interventions and CIC (currency in circulation) outflows,” said Nathan Sribalasundaram, rates strategist at Nomura, in a report. “The outlook also remains bleak, given that we are past large bond redemptions; and as CIC outflows are likely to persist in the first quarter, we expect the banking market to remain in deficit for the next two months.”
In recent discussions with RBI officials, bankers have proposed that the central bank implement more durable liquidity-injection measures, including open market bond purchases, foreign exchange swaps and longer-term repurchase operations.
Banking system liquidity significantly tightened over the past couple of weeks. The liquidity deficit, which had reached Rs 1.04 lakh crore on January 1, marginally eased in following days, remaining below the Rs-1-lakh-crore mark till January 6. However, the deficit resurfaced on January 7, touching Rs 1.44 lakh crore. According to RBI data, the deficit further deepened, reaching Rs 1.81 lakh crore on January 8 and Rs 2.01 lakh crore on January 9.
“The RBI continues its operations and has recently been conducting variable rate repos (VRRs) to inject liquidity. However, in our view, these are falling short of providing for liquidity needs of the market,” said Nathan.
Due to cash squeeze in the banking system, the interbank call money rate jumped 55 basis points above RBI’s repurchase rate of 6.50% on Thursday.
According to experts, frequent volatility in the banking system liquidity does not augur well for financing conditions, especially when the overall environment is not so favourable. The high volatility also acts as a deterrent for commercial banks in terms of addressing adverse loan-to-deposit ratios and asset liability pricing.