 "RBI")
The Reserve Bank of India’s (RBI’s) variable rate repo (VRR) auction to infuse liquidity into the banking system has received strong demand from lenders amid tight liquidity, with banks submitting bids for Rs 3.08 trillion against the notified amount of Rs 2.5 trillion.
The liquidity deficit widened to a record Rs 3.46 trillion on Wednesday, as compared to Rs 3.34 trillion on Tuesday.
The RBI will conduct another two-day VRR auction on Monday to infuse Rs 25,000 crore.
Market participants expect the liquidity deficit to persist in the range Rs 2-3 trillion in the coming month.
“Liquidity should ease a bit from Monday on the back of bond redemptions to below Rs 3 trillion, but will continue to remain in deficit and may ease to Rs 1.50 trillion to Rs 2 trillion in first week after the release of government spending,” said V R C Reddy, head of treasury at Karur Vysya Bank. “I don’t expect the RBI to conduct VRR for large amounts from here on, and the upcoming auctions should be below Rs 2 trillion,” he added.
Bonds worth Rs 59,533 crore are scheduled for redemption on Monday.
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“The last quarter generally witnesses tight liquidity. It should ease on the back of government spending by month-end around the Budget,” Aditya Vyas, chief economist at STCI Primary Dealer.
“System liquidity could stabilise at around a deficit level of Rs 2.5-3 trillion or lower for now, on the back of VRRs, redemptions and government spending,” he added.
The banking system’s liquidity primarily stayed in deficit during the third quarter this financial year, and it widened further in January, driven by tax outflows.
In the preceding VRR auction, the RBI received a significant response, with banks submitting bids in the range 2.5-3.2 times the notified amount due to tight liquidity. The central bank had conducted a VRR auction after six months on December 15.
“I see neither liquidity nor the overnight market rates easing anytime soon. The deposit too is under stress,” the treasury head at a private bank said.
“The RBI is comfortable keeping liquidity substantially in deficit,” he added.
On Thursday, the weighted average call rate was 6.78 per cent and treasury bills repurchase rate 6.75 per cent, both well above the repo rate of 6.50 per cent.
Higher rates raise the cost of funds for banks because they mop up short-term funds from the money market.
Market participants said liquidity continued to remain tight due to increase in cash in circulation and sluggish deposit growth. Over the past 12 months, deposits have exhibited a slow rate of expansion compared to advances. According to the RBI data, bank credit expanded 15.8 per cent Y-o-Y as of December 15, 2023, while deposit growth was 13.3 per cent.
Meanwhile, the cut-off yield at the weekly government bond auction was set lower than expected as traders covered short bets at the auction, dealers said.
The yield on the benchmark 10-year government bond fell 2 basis points during the day. However, it settled flat at 7.18 per cent against what it was on Wednesday on caution ahead of the Budget.
The RBI set the cutoff yield on the five-year bond at 7.05 per cent, on the 10-year bond at 7.18 per cent, and on the 50-year bond at 7.35 per cent.
