The Reserve Bank of India‘s (RBI) liquidity infusion has led to a sharp drop in call or overnight lending rates. According to data from Bloomberg, the call rate fell to 4.40% on Thursday – the first time since August 3, 2022. Even the difference between the repo rate and call rate was at a 7-month high of 85 basis points. Call rate is the rate at which banks with surplus funds lend to other banks, typically for one day.
“The RBI’s liquidity injection of Rs 1.36 lakh crore through term VRR (variable rate repo) operations led to an improvement in liquidity position. This eased borrowing pressures and pushed overnight call rates below the repo rate,” said V R C Reddy, treasury head at Karur Vysya Bank.
Engineering a Rs 2 Lakh Crore Surplus
“Liquidity surplus, alongside government spending, appear to be working. I expect the surplus to be sustained now with some deviation during tax outflows,” said Alok Singh, treasury head, CSB Bank.
He added that if the liquidity surplus goes down by March, the RBI would bring in support either through OMO or swaps. “The surplus should sustain above Rs 1 lakh crore for a smooth transition to next financial year,” added Singh.
The RBI has conducted two 90-day VRRs on January 30 of Rs 25,000 crore and Rs 2 lakh crore.
According to the RBI’s data, the banking system has come back to surplus liquidity after almost two months. The system liquidity averaged Rs 66,000 crore in January and Rs 72,000 crore in December, sharply below the 1% of net demand and time liabilities (NDTL).
On February 3 and February 4, the system liquidity stood at Rs 2.16 lakh crore and 1.96 lakh crore, respectively. For comparison, the average system liquidity was Rs 1.78 lakh crore in November. The liquidity has been under pressure due to the RBI’s continuous intervention in the forex market and higher credit growth than deposits.
The amount parked by banks at the standing deposit facility (SDF) was at Rs 3.42 lakh crore compared to an average of Rs 1.40 lakh crore in the previous month.
Policy Watch
The RBI has been continuously infusing liquidity since December through open market operations and forex swaps. It has conducted bond purchases worth Rs 3.5 lakh crore through open market operations and FX swaps of $13 billion.
Liquidity pressure is expected to ease further, as the another tranche of bond purchases and FX swaps has yet to fully reflect in the system. Additionally, FX intervention strain has reduced following the tariff cut announcement, according to Reddy.
When the RBI is set to announce the outcome of its monetary policy committee meeting today, market participants will keenly watch any commentary on liquidity, especially after the government’s higher than expected borrowing limit of Rs 17.2 lakh crore for the next fiscal.