Banking system liquidity went into deficit again on Friday after being in surplus on Thursday, the latest data released from the Reserve Bank of India (RBI) showed. Market participants said liquidity within the banking system has shown signs of easing due to increased government spending.
According to RBI data, the central bank injected Rs 11,496 crore on Friday, an amount much less than what it was during the early part of the week.
Market participants expect that liquidity will gradually improve either by the end of the current month or within the initial week of September, on the back of government spending.
“We are hearing from other market sources that from today (Monday) onwards there will be government spending and liquidity will be eased out this week,” a dealer at a state-owned bank said.
The Reserve Bank of India has been leveraging liquidity conditions in its fight against inflation. Consequently, the banking system’s liquidity slipped into deficit mode in the previous week as RBI decided to withhold a significant portion of banks’ surplus funds, aimed at curbing inflationary pressures exacerbated by the outflow of taxes.
Market participants speculated that interventions by RBI in the foreign exchange market by selling dollars in order to protect the rupee from sharp further depreciation also weighed on liquidity.
The rupee appreciated by 3 paisa on Monday to settle at Rs 82.63 per US dollar on the back of foreign inflows in the domestic equities, dealers said. The local currency touched the day’s high of Rs 82.53 per US dollar in early trade.
“There were inflows and rupee demand was there,” a dealer at another state-owned bank said. “But we also heard that the central bank was there; that’s why the rupee fell from Rs 82.53 level to the closing level,” he added.
Comments by US Federal Reserve Chair Jerome Powell on Friday failed to give any clear guidance on the future rate trajectory. Market participants considered the comments by Powell confusing.
Consequently, traders resumed their value-buying in the domestic government bond market. Traders expect the yield on the benchmark 10-year bond to remain below the psychologically crucial 7.25 per cent mark due to the lack of significant cues, dealers said.
The yield on the benchmark 10-year government bond fell by 2 basis points to settle at 7.18 per cent, against 7.20 per cent on Friday.
“Those who were on the sidelines ahead of the speech have resumed their buying spree,” a dealer at a primary dealership said. “Mutual funds were sitting on funds that they deployed in the market today (Monday),” he added.