Reserve Bank of India may need to pump in funds on liquidity crunch

GST payments and quarter-end credit demand may lead to such a situation

Funds flowing out because of advance tax payments and impending goods and services tax (GST) towards the end of the month may weigh on liquidity in the banking system.

The outgo on account of advance tax was Rs 1.16 trillion.

The rise in credit offtake at the close of the first quarter (Q1FY24) may also add to fund requirements, creating conditions for the Reserve Bank of India (RBI) to pump liquidity into the system, bankers said.

Soumyajit Niyogi, director, Core Analytical Group, India Ratings & Research, said the return of money into the system due to the withdrawal of Rs 2,000 notes improved liquidity in June compared to what it was last month.

The RBI absorbed Rs 1.58 trillion through money market operations on Thursday. This surplus liquidity level is just about sufficient for the system.

The call rate, which is the interest rate on money raised overnight, moved up last week (ended June 16) in tandem with a rise in demand for funds (advance tax and preparations for GST in June), Niyogi added.

GST collection stood at Rs 1.57 trillion in May.

The Clearing Corporation of India (CCIL) data showed the weighted average call rate moved up from 6.4 per cent on June 13 to 6.65 per cent on June 16, showing varying liquidity conditions across banks. They are expected to move around this level in the coming week, money market dealers said.

After the monetary policy review meeting on June 8, RBI Governor Shaktikanta Das had said the central bank would like to see the overnight call rate aligned to 6.5 per cent. Beyond that, it is a function of day-to-day fluctuations or week-to-week variations in the overall liquidity situation.

As for infusing funds or taking out liquidity, Das said the preference for the variable repo rate (V-RR) to pump in funds or the variable reverse repo rate (V-RRR) to mop up excess money depended on the situation in the market.

The RBI will remain nimble and flexible, and act swiftly, he said.

Madan Sabnavis, chief economist, Bank of Baroda, said banks were better prepared in managing funding requirements. They have been cautious about participation in the RBI’s V-RRR auction.

Last week, in the V-RRR auction for Rs 50,000 crore, banks put in just Rs 16,000 crore, reflecting prudence in fund management.

While funding needs in the system are up, there may be no need for the RBI to conduct V-RR to inject liquidity, Sabanavis said.

While bank credit grew by Rs 3.3 trillion to Rs 187 trillion in the current financial year so far (June 2), deposit mobilisation has been much higher at Rs 6.58 trillion in the same period, according to the RBI data.