Amid advance tax outflows, system liquidity fell to a three-month low to Rs 70,579 crore on Tuesday, compared to Rs 1.89 lakh crore on Monday. These low levels were last seen on April 22, 2025. The banking system’s liquidity averaged to Rs 2.8 lakh crore in August and Rs 3 lakh crore in July as RBI ensured sufficient liquidity since the policy rate cut for a smooth transmission to take place.
Overnight rates spike on tight liquidity
The dip in liquidity also pushed the overnight rates higher on Wednesday as participants went for panic borrowing, said market participants. The inter-bank call money rate rose 5.65% before settling at 5.47%, up from 5.43%. The tri-party repo rate (TREPs) rose to 5.75% and the weighted average TREPs closed at 5.44%, up from 5.37% on the previous day.
“Everyone assumed that RBI would announce the VRR today (on Wednesday), which did not happen, and everyone came to borrow, at which point the interest rate had increased to 5.70 level, and then it had dropped to 5.40%,” said a dealer at a private sector bank. The volumes also rose in the call money market to Rs 22,370 crore compared to the average volume of Rs 16,000-17,000 crore in the last three months.
RBI expected to step in with VRR support
Though the decline in liquidity surplus is a transitory, most market participants said that they did not expect it to fall below Rs 1 lakh crore as the first tranche of reduction in cash reserve ratio came into effect last fortnight (on September 6). It pumped around Rs 65,000 crore into the system. However, they expect system liquidity to improve going ahead and come back to the previous levels.
“The fall in liquidity is transitory. By the month end, liquidity will come back to the previous level followed by the government month-end spending,” said V R C Reddy, head of treasury, Karur Vysya Bank. Agreeing with him, another dealer added that RBI is likely to conduct variable rate repo (VRR) auction this week to ensure sufficient liquidity at 1% of net demand and time liabilities (NDTL).
On Tuesday, RBI had conducted a three-day VRR auction which received a poor response from the market. Participants bid Rs 585 crore against the notified amount of Rs 75,000 crore as their rates were cheaper in TREPs. “VRR was a signal for the market that liquidity will go downwards. The auction did not have a good response as participants borrowed from TREPs to meet their requirements,” said a dealer at a public sector bank.