Borrowings by banks through the marginal standing facility (MSF) rose to a record high on September 18 after the liquidity in the banking system fell in to huge deficit in the wake of tax outflows. According to the Reserve Bank of India’s (RBI) money market operations data, borrowings by banks via MSF stood at Rs 1.97 lakh crore on September 18, with liquidity in the system on that day standing at a deficit of around Rs 1.47 lakh crore.
“Quarterly advance tax flows to the tune of Rs 1 lakh crore added with GST (goods and services tax) outflows of Rs 90,000 crore makes the situation more stressed and call rates spiked above the MSF rate. Hence, banks borrowed Rs 1.97 lakh crore through MSF, the highest amount since its inception,” said V. Ramachandra Reddy, deputy general manager (treasury), Karur Vysya Bank.
Liquidity in the banking system has been tight in the days since the RBI announced the incremental cash reserve ratio (I-CRR) in August. I-CRR was introduced with an aim to remove surplus liquidity overhang in the system, which was caused due to the withdrawal of currency notes of Rs 2,000 denomination from circulation.
As on September 1, the RBI said that Rs 3.32 lakh crore worth of Rs 2,000 banknotes, or 93 percent of the notes in circulation, had returned to the banking system. Of the total notes received, about 87 percent were in the form of deposits and the remaining 13 percent were exchanged with lower denomination bills of lower denomination.
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Will this trend continue?
Bank treasury heads said that the systemic liquidity tightness will ease in the coming days after the second phased reversal of the I-CRR on September 23 that should release around Rs 30,000 crore, though Reddy believes tight liquidity is likely to continue till at lease the end of the month.
Adding to this, Arun Bansal, head of treasury, IDBI Bank, said that even as the government will start spending out of the tax collections, the infusion of Rs 75,000 crore with the second and third rounds of I-CRR relaxation will ease the liquidity situation.
The third round of revisal will take place on October 7, according to the RBI's release.
Impact on rates
After the liquidity in the banking system turned deficit, overnight call money rates—the interest banks pay for money they borrow from other banks for short periods, typically one day—started going up and traded above the MSF rates, which dealers said drove banks to the MSF table. The weighted average overnight call money rate was trading at 6.8439 percent at 12.35 pm, according to the Clearing Corporation of India.
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Will RBI announce VRR auction?
Dealers said that the central is unlikely to announce the variable rate repo or VRR auction in the near term, but if deficit liquidity sustains, there could be an announcement. “I feel the VRR is warranted only when the liquidity deficit sustains above Rs 1 lakh crore and the current situation is in line with the RBI’s stance of ‘withdrawal of accommodation’,” Reddy said.
The liquidity in the banking system was in deficit of around Rs 1.12 lakh crore as on September 20.
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