MUMBAI: The banking system’s liquidity surplus narrowed to Rs 542 crore on Wednesday following tax outflows, including goods and services tax (GST) payments, and tighter cash availability amid banks maintaining higher cash reserve ratio (CRR) balances.
The weighted average call rate (WACR) rose to 5.69 per cent, close to the Reserve Bank of India’s (RBI’s) marginal standing facility (MSF) rate of 5.75 per cent, compared with 5.65 per cent on Tuesday.
System liquidity could move into deficit for a few days before government spending begins to replenish funds in early November. However, the banking system could remain in a persistent deficit from mid-November as the core liquidity surplus continues to decline, market participants said.
Core liquidity, which includes banking system liquidity and the government’s cash surplus, fell to Rs 9.4 trillion on October 9 from Rs 14.2 trillion on September 4. Market participants said it could decline further to around Rs 4.9 trillion by December-end and approach Rs 1 trillion by March.
The government’s cash surplus stood at Rs 5.9 trillion as of October 9 and is estimated to have risen to Rs 6.9 trillion following GST inflows. The balance could decline to around Rs 2 trillion by March, partly depending on the government’s short-term borrowing through treasury bills.
“By mid-November, you can easily have a persistent system liquidity deficit,” said Gaura Sen Gupta, chief economist at IDFC FIRST Bank, adding that the underlying trend points to tighter liquidity over the coming months.
The central bank on Wednesday rejected all bids at the government’s treasury-bill auction, signalling discomfort with the sharp rise in short-term borrowing costs. The government had planned to raise Rs 23,000 crore through the sale of 91-day, 182-day and 364-day treasury bills. Traders said the yields demanded by investors may have been higher than the RBI’s expectations.
The RBI is likely to continue conducting variable rate repo (VRR) auctions to keep overnight rates within the policy corridor, particularly as the WACR approaches the MSF rate.
The market participant said the central bank would need to inject liquidity through VRR auctions to prevent overnight rates from persistently breaching the upper end of the liquidity corridor.
“The VRR auctions will be required to keep the overnight rates below MSF at least if not near repo rate,” said a money market dealer at a state-owned bank. “The demand is also expected to be good, given the RBI is giving money at 5.54 per cent when overnight rates are at 5.70 per cent,” the person added.
The central bank received bids amounting to Rs 1.62 trillion against the notified amount of Rs 50,000 crore at its overnight VRR auction on Thursday.
Source; Business Standard
