Liquidity deficit narrows to less than Rs 1 trn as govt spending picks up

Liquidity may not improve immediately as tax outflows of around Rs 1.25 trn are scheduled in March, says one expert

Liquidity deficit in the banking system narrowed to more than a two-month low on the back of government spending, said market participants. Liquidity improved to Rs 88,698 crore on Thursday, according to data provided by the central bank.

The last time the deficit fell below Rs 1 trillion was on December 15, 2023. A market participant said the liquidity may not improve immediately as tax outflows of around Rs 1.25 trillion are scheduled in March.

“The liquidity improved because of government spending, which was expected to kick in from March,” said a dealer at a state-owned bank. “It should remain at these levels until the tax outflows which are expected to be around Rs. 1.25 trillion,” he said.

Money market dealers said the Reserve Bank of India (RBI) could continue refining operations with short-tenure variable rate repo auctions and variable rate reverse repo auctions.

Money market rates have averaged close to the repo rate of 6.50 per cent, hovering around the Marginal Standing Facility (MSF) rate. The RBI could drain liquidity from the system if money market rates dip below the repo rate, said market participants.

Weighted average money market rates stood at 6.54 per cent on Friday. “The RBI should continue with the auctions, but in small amounts and shorter tenures,” said a money market dealer at a state-owned bank. “I think they will keep the deficit of around Rs 1 trillion in the system,” he said.

RBI Governor Shaktikanta Das, in his monetary policy statement on February 8, said liquidity conditions were shaped by external factors and they were expected to rectify in the future.

The RBI was agile and adaptable in its liquidity management, employing both repo and reverse repo operations, he said. The RBI would use a mix of instruments to regulate short-term and long-term liquidity, ensuring that money market interest rates evolved systematically while ensuring financial stability.