The banking system liquidity bounced back to surplus mode after three weeks on Friday, Reserve Bank of India (RBI) data showed, which was due to government spending, according to dealers.
The liquidity situation could further ease with the disbursement of the last tranche of Incremental Cash Reserve Ratio (I-CRR) worth Rs 50,000 crore on Saturday.
As liquidity improved, bond market participants expected the RBI to announce Open Market Operations (OMO) of bond sales to absorb liquidity.
The market expects the central bank to sell bonds worth between Rs 10,000 crore to Rs 15,000 crore in the auction.
Consequently, traders squared off their positions by the end of the trade, leading to the hardening of yields. The yield on the benchmark 10-year government bond settled at 7.38 per cent on Monday, against 7.34 per cent on Friday.
“The liquidity improved because of government spending and roll-back of I-CRR,” a dealer at a primary dealership said. “As liquidity is in surplus now, there are expectations the RBI will come up with a notification on OMO; that’s why yields rose by the end of the day,” he added.
Banks parked Rs 2,760 crore on Friday, according to data by the RBI. The lenders parked Rs 5,390 crore and Rs 9,071 crore on Saturday and Sunday, respectively.
The RBI Governor, Shaktikanta Das, had said on Friday that the central bank might conduct open market operations to mop up excess liquidity.
“Going forward, while remaining nimble, we may have to consider OMO sales to manage liquidity, consistent with the stance of monetary policy. The timing and quantum of such operations will depend on the evolving liquidity conditions,” Das said.
The rate-setting panel has identified high inflation as a major risk to macroeconomic stability and sustainable growth, he said. Accordingly, the focus remains on aligning inflation to the 4 per cent target on a durable basis.
The market expects the surplus liquidity to persist for the next two weeks before the Goods and Service Tax (GST) outflows start around 20 October.
“The liquidity should remain positive for two weeks, and then we have GST outflows from 19-20 October; it will again move to deficit mode,” a dealer at another primary dealership said.
The deficit liquidity neared Rs 1.47 trillion on 19 September, the highest since 29 January 2020, when the banking system liquidity deficit went up to Rs 3 trillion. The liquidity went into deficit mode on 21 August for the first time in the current financial year.