Advance tax payments push the banking system liquidity into deficit

Liquidity in the banking system slipped into deficit mode once again ahead of the second tranche of Incremental Cash Reserve Ratio (I-CRR) disbursement on September 23, due to tax outflows, dealers said.

The Reserve Bank of India (RBI) injected Rs 45,699 crore on Friday, Rs 68,785 crore on Saturday and Rs 67,576 crore on Sunday.  

“The estimates are that around Rs 90,000 crore to Rs 1 trillion will go out as goods and services tax (GST) outflow,” a dealer at a primary dealership said.

“The deficit liquidity should not persist as government spending is scheduled in the later part of the month. It should bring the surplus liquidity back to Rs 1 trillion,” he added.

Surplus liquidity in the banking system went into deficit mode for the first time in the current financial year on August 21. This was on the back of I-CRR and GST payments.

The RBI had decided on September 8 to discontinue the I-CRR by October 7, in a phased manner.

Out of the total I-CRR maintained, 25 per cent will be disbursed on September 29, another 25 per cent on September 23, and the remaining 50 per cent will be released on October 7.

Market participants believe that the disbursement of Rs 25,000 crore as the second tranche of I-CRR will not be enough. And, the RBI may have to come up with other measures to bring the liquidity back to surplus mode.  

“We’ll have to see whether the RBI is comfortable with this or it comes up with something like a variable rate repo (VRR) auction,” a dealer at a primary dealership said.

However, a segment of the market believes that it is highly unlikely that the central bank will conduct a VRR auction.