Liquidity deficit narrows to a month's low on RBI measures, govt's month-end spending

Reserve Bank of India

The cash shortfall in the banking system narrowed to almost a month’s low this week following a string of measures taken by the Reserve Bank of India to ease liquidity and month-end spending by the government, experts said.

The central bank’s open market operations (OMO), USD/INR Buy Sell swap auction and daily variable rate repo (VRR) auctions also helped the liquidity deficit to narrow.

According to RBI data, liquidity deficit in the banking system stood at Rs 45,005.65 crore on February 5, the lowest since January 5 when it was Rs 28,957.58 crore.

“Liquidity conditions have improved due to OMOs, RBI Buy sell swaps and government spending,” said Gopal Tripathi, head of treasury at Jana Small Finance Bank.

Liquidity has been under stress in the last few weeks and the shortfall touched almost Rs 3 lakh crore in January due to higher tax outflows in December, RBI’s intervention in the foreign exchange market to defend the rupee and lower government spending.

In December, banks saw an outflow of around Rs 3 lakh crore due to goods and services tax and advance tax outflows.

The RBI’s move to sell dollars sucked out a large chunk of liquidity. In the last two months, the central bank has spent $25 billion to defend the rupee from a steep fall.

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

The higher liquidity deficit led to an increase in overnight night rates above the repo rate. The deficit started around December 16 following which the RBI supported liquidity through VRR auctions with shorter tenures.

Initially, the RBI was injecting liquidity through routine VRR auctions, then on January 16 it announced the daily VRR auction and followed it up with a slew of measures to ease the pressure.

The central bank has injected Rs 28.27 lakh crore through VRR auctions. Of the total, Rs 14.65 lakh crore was through daily VRR auctions and the remaining Rs 13.62 lakh crore through general VRR auctions.

The central bank also pumped in 20,020 crore through OMO purchases.

Experts, however, expect the liquidity deficit to widen again due to heavy tax outflows in March, as the financial year closes.