Liquidity returns to banking system, interbank call rates softening

Liquidity has started returning to the banking system, bringing down interbank call rates. The Reserve Bank of India (RBI) absorbed Rs 6.64 trillion as of January 3, the data released on Monday showed.

This indicates that the liquidity deficit witnessed after December 15 was mainly because of advance tax outflow, and not because of any extra effort by the central bank to drain out liquidity.

The advance tax collected is now being spent by the government, rectifying the liquidity condition. According to CARE Ratings, the banking system has a liquidity surplus for the past 19 months. This is mainly because bank deposits are surpassing the outflow of bank credit. The incremental bank deposits (over March 2020) have grown by 6.7 per cent, till 18 December 2020, as against bank credit growth of 1.7 per cent. Additionally, the various liquidity infusion measures being undertaken by the RBI, such as open market operations (OMO) purchase, long-term repo operations (LTRO), and targeted LTRO have been adding to the liquidity surplus.

So far this fiscal year, the RBI has undertaken OMO purchase of government securities of up to Rs 3.57 trillion and OMO purchase of state bonds of Rs 30,000 crores.

With the system liquidity getting restored, the weighted average call money rate also fell. On 31 December, call rates had shot up to 3.31 per cent, but on January 1, they fell 3.1 per cent. Call rates have again seen a spurt. 

On Monday, the weighted average rate was at 3.44 per cent. What’s important to note here is that the call money rates continue to remain below the RBI’s reverse repo rate of 3.35 per cent. That has been the case for over two months. In the coming weeks, liquidity is expected to remain in a substantial surplus mode, and call money rates are expected to remain soft.