The Reserve Bank of India’s (RBI) measures and seasonal tax payments have helped ease banking system liquidity from its recent peaks. The system liquidity stood at Rs 4.92 lakh crore as of Monday, sharply down from an average surplus of Rs 10.34 lakh crore in the first two weeks of September. It touched a record high of Rs 11.16 lakh crore as on September 6, according to the RBI data.

The surge in banking system liquidity was largely driven by strong inflows through FCNR(B) deposits. Banks have mobilised $132.98 billion via the special deposit scheme, the latest data showed.

ALSO READ

To absorb excess liquidity and mitigate potential inflationary pressures, the RBI announced bond sales worth Rs 1 lakh crore through open market operation auctions. The RBI has purchased bonds worth Rs 75,000 crore across the first two tranches, with the remaining Rs 25,000 crore tranche scheduled for September 28. Meanwhile, banks have parked Rs 3.4 lakh crore with RBI under variable rate reverse repo (VRRR). The RBI continues to conduct overnight variable-rate reverse repo (VRRR) operations to manage liquidity.

Market participants said that the central bank has also been using forex swaps to absorb liquidity.

“Liquidity has declined due to tax outflows, some RBI intervention in the forex market, and bond sales via open market operations (OMOs). If liquidity stands below Rs 5 lakh crore by September-end, no major steps are expected from the RBI. However, we will need to monitor how liquidity evolves in the coming period,” said a treasury head at a private bank.

A fixed income head of a mutual fund said that higher credit growth and increased currency circulation are expected to gradually absorb excess liquidity, while some tax-related outflows may return. “Given that liquidity remains elevated, further RBI action cannot be ruled out.”

ALSO READ

Meanwhile, market participants said the RBI could announce further measures in the upcoming policy review, as system liquidity remains above the comfortable level of 1% of NDTL.

Following the decline in system liquidity, the weighted average call rate (WACR) has risen closer to the RBI’s repo rate of 5.25%. WACR ended at 5.24% on Tuesday compared to 4.98% two weeks back.