Indian banking system liquidity slipped into a deficit for the first time since end-March, as the Reserve Bank of India’s (RBI) temporary liquidity withdrawal and tax outflows impacted banks’ funding, traders said on Tuesday.
Banking system liquidity stood at a deficit of 236 billion rupees ($2.84 billion) as of Aug. 21, according to RBI data. Liquidity surplus had hit a 13-month high of 2.8 trillion rupees at the start of the month, but has been dropping since then. “Liquidity situation has definitely tightened after the ICRR (incremental cash reserve ratio) move and tax outflows, which is pushing up overnight rates as reliance on that borrowing has risen,” said V. Lakshmanan, head of treasury at Federal Bank.
Overnight rates have stayed closer to RBI’s marginal standing facility (MSF) rates since the start of this fortnight, with most banks remaining on borrowing side.
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Weighted average call rate is around 6.71%, while weighted average TREPS rate is around 6.68%. Kotak Mahindra Bank expects deficit to rise to around 400 billion rupees by end of this week.
Liquidity is expected to stay in deficit and overnight rates are seen staying elevated, but market participants are ruling out any additional infusion from the RBI in form of repo auctions.
“The RBI’s intention was to push up rates without delivering an actual hike, and this is probably the desired result, so any probability of a repo infusion remains very low and overnight rates will oscillate between repo rate and MSF rate,” said VRC Reddy, treasury head of Karur Vysya Bank.
Earlier in the month, RBI told banks to hold an incremental cash reserve ratio (CRR) of 10% on the increase in deposits between May 19 and July 28, which has led to withdrawal of over one trillion rupees. The RBI will review this by Sept. 8.