RBI mopping up excess liquidity, tax outflows could push up interbank call rates, say dealers

RBI

A fresh auction announced by the Reserve Bank of India (RBI) on Monday to drain surplus liquidity from the banking system, coupled with expected outflows on account of tax payments, may lift interbank call money rates closer to the central bank’s repo rate in coming days, dealers said.

The call money rate is the rate at which banks lend or borrow short-term funds to and from each other in money markets. Typically, when the banking system liquidity is in surplus, call rates tend to fall, and rise on the reverse.

“To balance excess liquidity from the banking system, the RBI is conducting back-to-back reverse repo auctions, which may also push up call money rates that are currently below the repo rate,” said Mahendra Kumar Jajoo, Chief Investment Officer – Fixed Income at Mirae Assets Mutual Fund.

At present, the weighted average overnight call money rate is trading at 6.3432 percent whereas the repo rate is at 6.50 percent.

During April and May, the weighted average call money rate remained in the range of 6.55 percent to 6.79 percent. This was above the repo rate and close to the marginal standing facility rate of 6.75 percent.

Improvement in system liquidity

The liquidity in the banking system improved after the withdrawal of Rs 2,000 notes from circulation, and was further aided by government month-end spending towards salaries and pensions, dealers said.

Currently, the liquidity in the banking system is estimated to be in surplus of around Rs 2.38 lakh crore, rising from Rs 80,614.45 crore on May 25.

Last week, RBI Governor Shaktikanta Das said the central bank will ensure adequate liquidity in the banking system.

Also read: Liquidity of banks to improve as Rs 2000 notes being deposited: Report

Latest auction

On Monday, the central bank said it will conduct four-day Variable Rate Reverse Repo (VRRR) auction for a notified amount of Rs one lakh crore.

Dealers were expecting the demand for this auction will be better as it has a shorter tenor and matures before the advance tax payments.

However, still the demand remained muted and the auction got partially subscribed. Banks parked Rs 66,640 crore at 6.49 percent cut-off rate at four-day auction.

Prior to this, the central bank also conducted a 14-day VRRR auction for a notified amount of Rs 2 lakh crore but received a muted response from the banks, which parked only Rs 50,868 crore.

According to Gaura Sengupta, India Economist, IDFC First Bank, the low demand in the earlier VRRR auctions was explained by the fact that liquidity was lower then. A possible explanation behind the low demand for the June 2 auction would be the upcoming liquidity outflow due to advanced tax payments on June 15.

Further, Venkatakrishnan Srinivasan, Founder and Managing Partner, Rockfort Fincorp, said banks are not comfortable placing their funds in VRRR for a longer period based on past experience.

“Banks have been witnessing RBI’s recent discomfort on additional liquidity in the system due to inflationary concerns and acting swiftly to drain out extra liquidity. Hence, most of the banks don’t mind keeping some additional liquidity with them,” Srinivasan added.

Also read: RBI Annual Report: Standing Deposit Facility costs RBI Rs 7,445 crore in first year

Expected outflows

Going forward, the liquidity in the banking system is expected to tighten due to various lined-up outflows such as advance tax payments, excise tax and Goods and Services Tax (GST).

“There is a likelihood of impending outflows from the banking system as the first instalment of advance tax payable by corporates is due on June 15. This will result in payments to be made to the government by eligible entities, which will reduce liquidity in the system,” said Jyoti Prakash Gadia, Managing Director, Resurgent India.

Dealers further said some banks even believe that the deposits received due to withdrawal of Rs 2,000 notes may get withdrawn over a period.

But despite the tightening of liquidity, dealers are not expecting rates on commercial papers and certificates of deposit, among others to move sharply up.

“Short-term rates are in a narrow corridor and may remain rangebound with no major impact,” said Ajay Manglunia, Managing Director and Head of Investment Group at JM Financial.