Festival spending, GST outflows push banking system liquidity into deficit

The net liquidity in the banking system has remained in deficit mode for four consecutive days. The system liquidity was in a deficit of Rs 2,645 crore on Thursday, the latest data by the RBI showed

Banking system liquidity fell into deficit mode in the current week after a month, since September 24, due to currency leakage amid festival season and goods and services tax (GST) outflows. 

The central bank plans to infuse Rs. 1 trillion on Monday via overnight VRR auction. 

 

Foreign exchange market participants said increased intervention by the Reserve Bank of India (RBI) via dollar sales further weighed on system liquidity.

 

Net liquidity in banking has remained in deficit mode for four consecutive days. The system liquidity was in a deficit of ₹2,645 crore on Thursday, latest data by the RBI showed.

 

Currency in circulation typically rises during the festival season, leading to reduced liquidity in the banking system.

 

Deficit stood at ₹70,169 crore on October 20, ₹61,647 crore on October 21, and ₹52,299 crore on October 22.

 

“There is leakage during the festival season. The GST outflows were scheduled which strained the liquidity,” said the treasury head at a private bank. “The intervention by the RBI is another reason,” he added.

 

Amid tighter liquidity conditions, the weighted average call money rate rose to 5.47 per cent during the week from 5.3 per cent in the previous week.

 

To ease the strain, the RBI conducted a three-day variable rate repo auction. The central bank injected ₹30,750 crore into the banking system.

 

“The strain is temporary; the government spending will kick in next week which will normalise the liquidity situation. That’s why we did not see much participation at the VRR auction,” said the treasury head at a private bank.