Banking system liquidity improves to touch 1-yr high; overnight rates ease

Liquidity in the banking system improved to one-year high on the back of government spending, said market participants. Banks parked Rs 2.78 trillion with the central bank on Sunday, the highest since August 3, 2023, according to the latest data released by the Reserve Bank of India.

“The liquidity is improving because after the Budget, both states and the central government have started spending,” said a dealer at a state-owned bank.

The weighted average overnight money market rates were traded below the standing deposit facility (SDF) rate – the floor of the liquidity adjustment facility (LAF) corridor – due to a rise in liquidity in the banking system, dealers said. The SDF rate currently stands at 6.25 per cent.

SDF, introduced on April 8, 2022, acts as a floor to the LAF corridor, while the ceiling or the upper end of the corridor is marginal standing facility (MSF). The SDF rate is 25 basis points (bps) lower than the repo rate, while the MSF is 25 bps over the repo rate. The policy repo rate is now at 6.5 per cent, with the SDF rate at 6.25 per cent and the MSF rate at 6.75 per cent.

According to Bloomberg data, the weighted average call rate also declined 5 bps on Monday to 6.44 per cent.

Market participants expect the liquidity to improve further.

“I think the surplus liquidity might touch Rs 3 trillion because it has been improving despite the goods and services tax (GST) outflows,” said a dealer at a private bank.

Market expects the RBI to use other tools to drain durable liquidity from the system, other than finetuning operations.

The RBI conducted a four-day variable rate reverse repo auction on Monday. Banks parked Rs 78,955 crore at the auction, against the notified amount of Rs 1 trillion, at a weighted average rate of 6.49 per cent.