Bankers don't see fresh liquidity measures by RBI at the October MPC review

The Reserve Bank of India (RBI) is unlikely to announce any additional liquidity measure during its October monetary policy review, slated on October 1, and will instead continue with variable rate repo (VRR) and variable rate reverse repo (VRRR) auctions to manage short-term liquidity, treasury officials with banks have said.

The central bank’s decision is expected to be guided by two key developments, the release of the second tranche of the cash reserve ratio (CRR) cut, which infuses durable liquidity, and higher government spending toward the end of the month.

“The existing liquidity framework is working well, and I do not expect RBI to introduce any major additional measures in the policy,” said V Ramachandra Reddy, DGM – Head Treasury, Karur Vysya Bank.

According to Reddy, the current liquidity deficit is transitory and should ease by the month-end with government spending and payment releases. The second phase of the incremental CRR rollback, effective October 4, is expected to inject about Rs 62,000 crore into the banking system, he added.

Reddy believed the RBI will continue to rely on VRRRs and VRRs to finetune liquidity, keeping an average of close to one percent of net demand and time liabilities (NDTL).

The banking system liquidity has recently come under pressure after the advance tax collections and goods and services tax (GST) payments, but it recovered after the government’s month-end spending towards salaries and pensions, and redemption of governments securities.

On September 23, Moneycontrol reported that liquidity in the banking system turned to a deficit after nearly six months. Currently, the liquidity in the banking system is in surplus of around Rs 55,005.69 crore as on September 29, according to RBI’s data.

Alok Singh, Group Head Treasury, CSB Bank, said no fresh liquidity measures are expected in the upcoming policy.

“The shortfall occurred due to tax outflows, which will be replenished through government spending. RBI will continue with the current liquidity management framework and the tools, however they may consider open market operations (OMO) purchases if liquidity does not improve to their desired level,” Singh said.

The RBI has been actively using variable rate operations to ensure that overnight money market rates remain aligned with the policy repo rate. With durable liquidity expected to improve in the coming weeks, treasury officials believe the central bank will prefer to stick to fine-tuning tools rather than introduce new liquidity measures in October.

The RBI panel’s meeting started on September 29, and will announce its decision on October 1. According to a Moneycontrol poll of 15 economists, bank treasury heads and fund managers, the MPC is likely to maintain status quo on rates in its October review.

Since February, the MPC has reduced the repo rate by 100 bps to support growth, with a 25 bps cut in February and April and 50 bps in June.