Liquidity deficit in banks widens to Rs 3.3 trn due to GST outflows

The deficit liquidity in the banking system widened to Rs 3.33 trillion on Tuesday, mainly due to outflows related to Goods and Services Tax (GST). The liquidity was in a deficit of Rs 2.72 trillion on Monday.

Consequently, the cut-off yields on the Treasury bills at auction on Wednesday were set higher than the previous week. The Reserve Bank of India set the cut-off yield on the 91-day, 182-day, and 364-day T-bills at 7.02 per cent, 7.19 per cent, and 7.17 per cent, respectively. The cut-off yield on the 91-day bill was set 5 basis points higher, whereas that on the 182-day and 364-day cut-off yield was set 2 basis points higher than the last week.

“The Reserve Bank of India (RBI) will necessarily have to infuse more durable liquidity into the banking system if the ongoing tight liquidity conditions persist. On a net basis, the RBI has injected liquidity averaging Rs 1.8 trillion during 16 December 2023 and 14 January 2024,” India Ratings and Research said in a note. “Amid the sustained liquidity pressure in the banking system, short-term money market rates, starting from overnight rates to commercial papers/certificates of deposit, have remained elevated for long. Ind-Ra believes this is not conducive for the financial system as well as economic growth,” it added.

The banking system's liquidity primarily stayed in deficit during the third quarter of the current financial year and it widened further in January, driven by tax outflows.

“Last two months, being the festival season, the cash in circulation has increased. Secondly, there was GST outflow. These are the two reasons for the liquidity deficit widening,” said V R C Reddy, head of treasury at Karur Vysya Bank. “We are approaching the month-end and budget. Government spending and bond redemption should narrow the deficit to around Rs 1.5 trillion,” he added.

The central bank has been conducting Variable Rate Repo auctions in order to infuse liquidity into the banking system. In the 2-day VRR auction conducted by the RBI on Tuesday, bids were received for Rs 1.97 trillion, against a notified amount of Rs 1.25 trillion.

In the preceding VRR auctions, the central bank received a significant response, with banks submitting bids ranging between 2.5 to 3.2 times the bidding amounts due to tight liquidity conditions in the system. Liquidity remained largely in deficit mode in the third quarter. The central bank had conducted a VRR auction after six months on 15 December.