MUMBAI: With liquidity deficit rising consistently, the Reserve Bank of India on Friday conducted a variable rate repo (VRR) auction of Rs 1.25 trillion. This has taken the total liquidity infused through the auctions so far this month to Rs 7.75 trillion.
Cash-starved banks have placed bids worth Rs 11.4 trillion — nearly 47% higher than the central bank’s notified amount. The RBI has conducted nine VRR auctions in May.
“We expect with the Rs 2.1 trillion dividend transfer to the government from the RBI coupled with the cancellation of weekly treasury bill auctions of Rs 60,000 crore, the banking system liquidity situation will meaningfully change. The central bank’s dividend transfer adds to the base money, which is durable in nature,” said Soumyajit Niyogi, director – core analytical group, India Ratings & Research. He expects this will improve the liquidity conditions and alleviate heightened pressure on the banking system deposit, thereby easing pressure on the cost of liabilities for banks.
The RBI received bids worth Rs 1.39 trillion from banks against the notified amount of Rs 1.25 trillion at the VRR auction held on Friday, reflecting high demand for cash from lenders. Banks borrowed the amount at a weighted average rate of 6.56%.
High bids from banks have come as liquidity tightness has increased during this month. According to the RBI’s latest data, liquidity deficit rose to Rs 2.37 trillion on May 22 from Rs 1.48 trillion on May 20 and Rs 1.3 trillion on May 19. The average system liquidity slipped into deficit of Rs 1.2 trillion for the first 15 days of May against a surplus of Rs 20,240 crore seen in April.
Bankers expect the cash squeeze to ease from next month after the new government takes charge and increases its spending.
“The government is expected to increase the pace of buyback of government securities to infuse more liquidity after getting more than expected dividend from the central bank,” said the head of treasury operations of a public sector bank.
A repo auction is conducted by the central bank to inject liquidity into the system. Banks can obtain liquidity overnight through RBI’s marginal standing facility when interbank liquidity dries up.
Source: The Financial Express