GST outflows to widen systemic deficit liquidity this week, say experts

The liquidity deficit will lead to marginal uptick in yields on short-term debt instruments such as treasury bills, commercial papers and certificates of deposit, among others.

The liquidity deficit in the banking system is likely to widen this week on the back of outflows on account of goods and services tax (GST) payments, experts said.

This will lead to marginal uptick in yields on short-term debt instruments such as treasury bills, commercial papers and certificates of deposit, among others.

Liquidity in the banking system as on March 18 was pegged at a deficit of around Rs 72,918.47 crore, as per Reserve Bank of India data.

“System liquidity deficit could widen post March 20, which is the due date for GST payments. However, it will be partly countered by government expenditure, which picks up in the last month of the financial year (March) and towards the end of each month,” said Gaura Sen Gupta, economist, IDFC First Bank.

Apart from the GST flows, Swati Arora, economist at HDFC Bank, adds advance tax payments to the reasons for liquidity drying up, though, besides the higher government spending, this should be tempered by a likely variable rate repo auction by the central bank.

As per a March 18 Kotak Mahindra Bank report, the banking system could see outflows of Rs 3.86 lakh crore between March 16 and March 22, and inflows of Rs 2.67 lakh crore.

The outflows include Rs 1.75 lakh crore of GST payments, and Rs 34,000 and Rs 50,200 crore worth of auctions of treasury bills and state development loans, respectively.

Money coming into the system will include Rs 1.85 lakh crore through government spending, over Rs 47,000 crore worth of coupon inflows, and Rs 28,900 crore and Rs 5,900 crore inflows of treasury bills and state development loan redemptions, respectively.

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Impact on short-term rates

Money market experts said the liquidity deficit widening will increase the short-term rates by 5-10 basis points in coming days. However, government spending will cap the rise to near the repo rate.

“The weighted average call rate is expected to be close to the repo rate as government expenditure has picked up in the month of March,” Gupta added.

Since the start of this month, the weighted average call money rate was trading below the repo rate on most days due to comfortable liquidity in the banking system. It has traded in the 6.11 percent to 6.55 percent range between March 1 and March 18.

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RBI support

Experts are of the view that if government expenditure continues to rise, the central bank may not conduct variable rate repo auctions.

The Reserve Bank of India (RBI) may roll over the previous auction which is due for maturity after the GST outflows, a dealer with a state-owned bank said.

This month, the variable rate repo auction conducted by the RBI on March 7 and March 16 is going to mature on March 22. The cumulative notified amount of both auctions was Rs 1.25 lakh crore.

On March 7, RBI conducted a 15-day variable rate repo auction worth Rs 50,000 crore. The central bank accepted bids worth Rs 50,007 crore.

The other auction was conducted on March 16 of 7-day variable rate repo worth Rs 75,000 crore. In this auction, RBI accepted bids worth  Rs 75,001 crore.