After enjoying massive liquidity since April, the system liquidity fell to a deficit on Monday, for the first time in the current financial year. This has led the Reserve Bank of India (RBI) to step in with another Rs 1 lakh crore variable rate repo (VRR) auction apart from the scheduled one.
The banking system’s liquidity fell to a deficit of Rs 31,987 crore on Monday on account of outflows related to goods and services tax (GST) and advance tax. The system liquidity surplus averaged to Rs 2.84 lakh crore in August and Rs 3.04 lakh crore in July.
RBI steps in with VRR auctions
“The tax outflows along with RBI unwinding its forward book led to liquidity crunch in the system. The current situation of deposit growth trailing credit growth will likely tighten the liquidity condition further. The RBI has already started VRR auctions to support system liquidity. However, I believe bond purchases via open market operations will help more, said Madan Sabnavis, chief economist, Bank of Baroda.
The RBI conducted two overnight VRR auctions on Tuesday, amounting Rs 1 lakh crore each to infuse liquidity into the system. The participants bid Rs 1.68 lakh crore in the first auction, while the second auctions received lower bids at Rs 40,510 crore. The cut-off was at 5.51% for both the auctions.
“After the first VRR result, the overnight rates cooled-off a bit. Therefore, some of the funding requirement was covered in TREPs, leading to a tepid response in the second auction,” said a dealer at a private sector bank.
Overnight rates rise, liquidity outlook cautious
Followed by the decline in the system liquidity, the overnight rates rose on Tuesday. The call rate climbed to 5.70% and the weighed average call rate (WACR) ended at 5.58%, while weighted average tri-party repos rate ended at 5.41%.
“I would not look at the liquidity crunch as much of a concern. Having said that, if there is an intervention on the dollar-rupee side, then the deficit will increase. In that case, I expect RBI to announce OMOs” said Alok Singh, head of treasury, CSB Bank.
Market participants expect system liquidity to remain under pressure this week. However, it will improve when the government’s month-end spending kicks in with further VRR auctions from RBI, they said. The second tranche of CRR cut will come into effect from October 4, which will release around Rs 60,000 crore, expected to support the liquidity going ahead.