 "Reserve Bank of India, RBI")
The worst of the liquidity deficit may be over, despite the heavy outflows scheduled over the next few days. The Reserve Bank of India (RBI), according to market participants, has signalled its support for banks with variable rate repo (VRR) auctions.
Bond market participants anticipate a mitigation of liquidity strain through factors, such as the reversal of variable rate reverse repo (VRRR), and government spending.
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Approximately Rs 4 trillion worth of outflows are expected because of advanced tax and GST payments in December. Additionally, a redemption of Rs 59,533 crore bonds is scheduled in January.
“The market feels that the RBI has given its first signal towards liquidity by conducting a VRR (auction) to reduce the impending tightness in liquidity. I think the worst of the liquidity deficit is over and from here on, we will see a slight easing of liquidity. This may also mean that the rate hike era is truly over,” said Vijay Sharma, senior executive vice-president at PNB Gilts.
Liquidity has remained largely in deficit mode in the current quarter.
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But the RBI infused Rs 59,260 crore and Rs 1.5 trillion on Friday and Sunday, respectively. The banking system liquidity deficit widened to a near five-year high on November 21 on the back of monthly goods and services tax payments; the central bank had infused Rs 1.74 trillion on that day.
“The RBI has been clear about the fact that liquidity was on an extremely much tighter side given the outflows on account of GST and other factors. This month will see the ending of a quarter. Most quarter endings generally see liquidity on the tighter side.
That’s the reason they (RBI) provided the VRR auction, which has eased liquidity to a certain extent. But given that it is just a seven-day instrument that they have given, this necessarily means that they are also expecting that liquidity will improve once the government spending comes in,” said Indranil Pan, chief economist at YES Bank.
That’s the reason they (RBI) provided the VRR auction, which has eased liquidity to a certain extent. But given that it is just a seven-day instrument that they have given, this necessarily means that they are also expecting that liquidity will improve once the government spending comes in,” said Indranil Pan, chief economist at YES Bank.
Against the notified amount of Rs 1 trillion, the RBI received bids worth Rs 2.7 trillion at the 7-day VRR auction – the first in six months. Banks borrowed the amount at a weighted average rate of 6.63 per cent. Significant demand was also fuelled by elevated call rates and tri-party repo (Trep) rates in the market, dealers said. Earlier, the central bank conducted a VRR auction on June 19.
The market expects that the central bank will abstain from conducting open market operations (OMO) of bond sales in the near term. However, if and when foreign inflows into bonds materialise, the central bank can utilize OMOs as a tool to manage liquidity, absorbing excess funds in the system.
“The market is not thinking about OMO right now, because the RBI governor made it clear that they (the central bank) would use the tool only to deal with liquidity, and given the current scenario, OMO is out of the question,” said the treasury head at a private bank.
The RBI has been conducting variable rate reverse repo (VRRR) auctions for the past six months to withdraw excess liquidity from the system. However, banks remained reluctant to participate in these VRRR auctions given the tight liquidity situation.
