The liquidity deficit in the banking system narrowed to more than two months low on the back of government spending, said market participants. The liquidity in the system improved to Rs 88,698 crore on Thursday, according to the latest data by the central bank. The last time the liquidity deficit fell below Rs 1 trillion was on December 15, 2023.
Market participants said that the liquidity may not see additional improvement due to upcoming tax outflows of around Rs 1.25 trillion scheduled in the current month.
“The liquidity improved because of government spending, which was expected to kick in from March,” said a dealer at a state-owned bank. “It should remain at these levels until the tax outflows which are expected to be around Rs 1.25 trillion,” he added.
Money market dealers said that the central bank might continue with its fine-tuning operations with short tenure Variable Rate Repo auctions and Variable Rate Reverse Repo auctions accordingly.
Money market rates have averaged close to the repo rate, from hovering around the Marginal Standing Facility (MSF) rate. There’s a possibility that the Reserve Bank of India (RBI) might drain liquidity from the system if money market rates dip below the repo rate, they said. The repo rate currently stands at 6.50 per cent.
The weighted average money market rates stood at 6.54 per cent on Friday.
“The RBI should continue with the auctions, but in small amounts and shorter tenures,” said a money market dealer at a state-owned bank. “I think they will keep the deficit of around Rs 1 trillion in the system,” he added.
RBI Governor Shaktikanta Das had elaborated on liquidity conditions in his monetary policy statement, ascribing them to external factors, and they were expected to rectify in the foreseeable future, bolstered by market interventions by the central bank.
The RBI, he said, was agile and adaptable in its liquidity management, employing both repo and reverse repo operations. He said the RBI would utilise a judicious mix of instruments to regulate both short-term and long-term liquidity, ensuring that money market interest rates evolved systematically while upholding financial stability.
First Published: Mar 01 2024 | 5:49 PM IST