Banking system liquidity fell into deficit mode on Tuesday after more than two months, due to GST outflows and advance tax payments, said market participants. The last time liquidity was in deficit was on June 27 of the current year. On Wednesday, the liquidity was in a deficit of Rs 2,626 crore, whereas on Tuesday, the liquidity deficit stood at Rs 4,982 crore, according to the latest data from the Reserve Bank of India.
Consequently, the RBI announced on Thursday that it plans to conduct a 14-day variable rate repo (VRR) auction on Friday (September 20) to infuse up to Rs 25,000 crore into the banking system.
Market participants said that the RBI might conduct more VRR auctions to infuse liquidity if the weighted average overnight money market rates do not align with the repo rate.
The weighted average money market rates settled at 6.53 per cent on Thursday. It had settled at 6.63 per cent on Tuesday. Since August, the weighted average money market rates were hovering significantly below the repo rate, reflecting the impact of surplus liquidity. The repo rate currently stands at 6.50 per cent.
The weighted average overnight money market rates briefly traded below the standing deposit facility (SDF) rate in August due to surplus liquidity. The average systemic liquidity surplus in August stood at Rs 1.49 trillion, up from Rs 1.02 trillion in July. Over the past 12 months, the average liquidity was Rs 0.49 trillion.
“The RBI might conduct more VRR auctions if the liquidity dries up further and money market rates fail to align with the repo rate,” said a dealer at a state-owned bank.
In August, liquidity in the system remained in surplus at Rs 1.46–2.86 trillion, prompting the central bank to conduct multiple variable-rate reverse repo (VRRR) auctions to manage the surplus. On August 4, the liquidity improved to a year high of Rs 2.77 trillion, on the back of government spending.
“The liquidity will remain at current levels for some time, and then by the end of the month, it might improve again because of government spending,” said a dealer at another state-owned bank.
First Published: Sep 19 2024 | 7:58 PM IST
