After remaining in surplus for over two months, banking system liquidity is expected to turn into deficit this week due to advance tax payments and GST outflows, market participants said.
Excess liquidity in the banking system stood at Rs 1.96 trillion on Thursday, according to the latest data from the Reserve Bank of India.
“Liquidity will turn into a deficit after advance tax payments, and we will also have GST outflows. It will pick up in October due to government spending,” said Madan Sabnavis, chief economist at Bank of Baroda.
In August, systemic liquidity remained in surplus between Rs 1.46 trillion and Rs 2.86 trillion, prompting the central bank to conduct multiple variable rate reverse repo (VRRR) auctions to manage the surplus. On August 4, liquidity improved to a year-high of Rs 2.77 trillion, supported by government spending.
Bond market participants said the liquidity squeeze might not have a major impact on bond yields in the near term as market sentiment has been upbeat since the cut in T-bill supply for the month of September. The RBI had cancelled the last two T-bill auctions in the current month.
“The market does not see liquidity as an issue at the moment. After the cancellation of T-bill auctions, short-term bonds are the order of the day,” said a trader at a state-run bank. “The RBI has been active from both sides; they will continue their usual operations of infusing and withdrawing liquidity when required,” he added.
Traders are also keeping an eye on the amount of rate cut the U.S. Federal Reserve will make at its next meeting for further clues, traders said.
The average systemic liquidity surplus in August stood at Rs 1.49 trillion, up from Rs 1.02 trillion in July. Over the past 12 months, the average liquidity surplus was Rs 0.49 trillion.
“The RBI has set aside enough headroom for capital outflows,” said Venkatakrishnan Srinivasan, founder and managing partner, Rockfort Fincap LLP. “Rates will not be affected much due to the drop in liquidity. The RBI does not seem comfortable with excess liquidity above Rs 1 trillion,” he added.
Since August, the weighted average money market rate has been well below the repo rate, reflecting the impact of excess liquidity. The repo rate currently stands at 6.50%. The weighted average money market rate stood at 6.47% on Friday.
“Liquidity in the Indian banking system remained in surplus for the second consecutive month in August. Higher government spending pushed it towards a one-year high during the first half of the month. Consequently, the weighted average overnight money market rates briefly traded below the standing deposit facility (SDF) rate. Nevertheless, the RBI resorted to multiple VRRR auctions almost every day of the month to mop up excess liquidity. Finally, August ended with the weighted average interbank benchmark rate (WACR) averaging 6.52 per cent, close to the RBI’s repo rate of 6.50 per cent,” according to a CRISIL report.
Moreover, certificate of deposit (CD) issuances rose 22 percent in August despite excess liquidity, driven by slow deposit growth. Market participants said that as liquidity turns into a deficit in the near term, banks may rush to raise funds through short-term debt instruments.
“August saw an increase in CD issuance to cover the mismatch between assets and liabilities amid falling deposits. In addition, slow deposit growth and a shift in retail investments led to an increase in CD issuance,” the report said.
Total CD issuances stood at Rs 82,020 crore in August, up from Rs 67,160 crore in July.
First published: September 15, 2024 | 18:52 IS
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