The liquidity in the banking system moved into surplus almost after three months as the Reserve Bank of India (RBI) absorbed over Rs 40,000 crore from the market on Monday, predominantly on the back of increased government spending.
However, this situation may be short-lived given the higher demand for funds to pay taxes and year-end targets, treasury executives said.
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Meanwhile, two variable reverse repo rate (VRRR) auctions held on Tuesday received weak response.
While the RBI offered to take Rs 1 trillion in the morning VRRR auction, it received offers worth Rs 72,840 crore. In the afternoon VRRR auction, the response was tepid with market participants offering to put just Rs 11,185 crore against a notified amount of Rs 75,000 crore.
“The market is going to be volatile this month, driven by financial year-end activities. This is the time to keep cash and not for investing,” said the head of treasury at a private bank. The RBI is slated to conduct a VRRR auction for Rs 1 trillion on Wednesday.
The government spending was less until the end of December 2023, leading to high cash balances and pressure on liquidity. The higher credit growth made the situation tighter. Now, the system has moved from a high liquidity deficit, which at times crossed Rs 2 trillion to excess when the RBI mopped Rs 40,901 crore through money market operations.
Gopal Tripathi, head of treasury and capital markets at Jana Small Finance Bank, said there was a significant change in the liquidity situation due to substantial spending by central and state governments. Plus, the central government borrowing is over. This means about Rs 33-35,000 crore, which was going out each week, remains in the system.
The surplus conditions may not last for long given the final instalment of corporate tax next week and goods and services tax (GST) by the end of the month, he added.
India Ratings in a market tracker released on Monday said liquidity in the banking system had remained tight, continuing from January 2024. The average deficit in the banking system remained around Rs 2 trillion in February and touched a high of Rs 2.5 trillion in the third week of February owing to monthly GST payments.
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While the liquidity has remained tight, the RBI has been managing the situation in terms of both regular variable rate repo and fine-tuning operations.
The liquidity situation is expected to remain tight in March 2024, coupled with higher volatility, owing to quarterly advance tax payments, monthly GST and year-end, the rating agency said.
10 states, one Union Territory raise Rs 28,000 crore via bond auction
Ten state governments and one Union Territory (UT) raised Rs 27,981 crore through auction of state government securities (SGS) on March 5. This was 27 per cent lower than Rs 38,200 crore indicated for this week in the Q4FY24 auction calendar. The spread between the cut-off of the 10-year SGS and the government’s 10-year bond (7.18 GS 2033) yield narrowed to 35 basis points (bps) on Tuesday from 37 bps last week. The weighted average cut-off of the SGS eased to 7.40 per cent from 7.44 per cent last week, lowest in the last 32 weekly SGS auctions, according to the rating agency ICRA.