Liquidity continues to be in deficit, banks expect RBI repo auction

Liquidity deficit in the banking system continued on Wednesday as the Reserve Bank of India (RBI) withheld a significant portion of lenders’ surplus funds to ease inflation.

The liquidity went into deficit mode on Tuesday for the first time in Financial Year 2023-23 (FY23). According to RBI data, the central bank injected Rs 23,644 crore on Monday and Rs 15,552 crore on August 22.

The market expects that the RBI could announce a variable repo rate (VRR) auction to infuse liquidity.

“The neutral level of liquidity is around Rs 65,000 crore-70,000 crore. Only to maintain RTGS (Real Time Gross Settlement) or any funds transfer, a bank has to maintain at least Rs 75,000 crore excess liquidity, more than the CRR (cash reserve ratio) requirement. So, a bank cannot fund it by borrowing at 6.75- 6.77 per cent continuously. So, Rs 1 trillion to Rs 1.5 trillion of banking liquidity is a must,” a dealer at a state-owned bank said.

“We thought the RBI will come out with any notification regarding repo auction, but it hasn’t till now.  Maybe because RBI knows about any government spending, any inflow should be there into the banking system. So, accordingly it manages,” he said.

The RBI has not conducted any variable rate reverse repo (VRRR) auctions to suck out liquidity since August 11. The weighted average call rate was trading around 6.84 per cent in the early trade on Wednesday. Overnight rates have stayed above the repo rate (6.5 per cent) since the I-CRR norm came into effect.

Market participants estimate a total outflow worth Rs 1.5 trillion due to goods and services tax (GST) and around Rs 63,430 crore from auctions this week of state loans, treasury bills, and government securities.