High liquidity deficit forces RBI to infuse record funds in December via VRR auctions

Reserve Bank of India

The high liquidity deficit in the banking system in December has prompted the Reserve Bank of India (RBI) to infuse funds through variable rate repo (VRR) auctions. These infusions were a multi-year high.

Additionally, the central bank had infused durable liquidity with a cut in the cash reserve ratio (CRR) in two phases in December to support heavy outflows from the banking system.

RBI data shows it has infused Rs 9.36 lakh crore through 14 VRR auctions, and Rs 1.16 lakh crore through a CRR cut.

Most of the VRR auctions in December by the central bank were fresh ones. Some were rollovers, because of short-term maturity.

Statutory outflows, forex market intervention prime factors

“Heavy statutory outflows and continued aggressive intervention by the RBI in the  forex market, which is evident from the drawdown in foreign exchange reserves, are the major cause of high liquidity support by RBI via VRR operations in December," said Mataprasad Pandey, vice-president of Arete Capital Service.

Forex reserves are down by around $60 billion since September-end,  he said.

Liquidity in the banking system came under pressure due to various factors, such as tax outflows and the RBI’s intervention in the forex market to stabilise the rupee.

The banking system saw outflows of over Rs 3 lakh crore as tax payments. On the other hand, the RBI intervention in forex market, costing around $60 billion, to stabilise the rupee, also put pressure on liquidity.

Usually, when the central bank intervenes in the forex market, it sells dollars and buys rupee, which removes liquidity from the banking system. The intervention is done through banks, and, hence, there is a always strain on liquidity in the banking system.

Surplus in the beginning of the week

In the beginning of December, liquidity remained in surplus mode.  It started turning deficit from December 16. As per RBI data, systemic liquidity remained in deficit of around Rs 1.32 lakh crore to Rs 2.42 lakh crore between December 16 and December 31.

Moderation in deficit has happened after month-end spending by the government for salaries and pensions. Currently, the banking system is facing a liquidity deficit of around Rs 67,444.58 crore, as per RBI data.

This has pushed the weighted average call money rate to trade over the RBI’s repo rate on most days in December.

The weighted average call money rate remained in the range of 6.50-6.88 percent, which was almost 30 bps higher than the repo rate.

Usually, when the call money rate rises, it impacts other short-term rates, such as rates on commercial papers, certificates of deposit, and treasury bills.