The Reserve Bank of India (RBI) is unlikely to announce any liquidity measures in the October monetary policy and may continue to withdraw liquidity through variable rate reverse repo (VRRR) auctions, money market experts said.
They added that the central bank may keep liquidity in surplus mode considering the expected outflows during the festive season, tax outflows and currency leakage.
“It is likely that there won't be any announcement on stance change or the liquidity front, as the RBI would want to keep the liquidity in the surplus due to the festive season ahead, considering outflows from indirect tax collections and currency leakage as well,” said Harsimran Sahni Executive Vice President Head Treasury at Anand Rathi Global Finance.
Usually, as the festive season starts, currency leakage increase, which results in the tightening of the liquidity conditions in the banking system.
Currently, liquidity in the banking system is estimated to be in surplus of around Rs 1.57 lakh crore, as per RBI’s money market operation data.
The liquidity in the banking has been in the surplus territory in the last two to three months after remaining in deficit for a longer period and the central bank is trying to remove excess surplus from banking system through VRRR auctions.
The central bank conducts VRRR auction to absorb surplus liquidity from the banking system.
Liquidity was in deficit mode till June, 2024, and since July it started to remain in surplus mode.
The higher surplus liquidity in the banking system pose a direct threat to the inflation target and financial stability. This is because higher liquidity can lead to higher asset prices.
On the threat to inflation due to liquidity front, Alok Singh, Group Head Treasury at CSB Bank said the surplus is still not inflationary because structurally there is still credit growth to catch up. “If deposit growth remains robust for few more quarters and CD ratio begin to fall, the surplus may become inflationary.”
The meeting of the Monetary Policy Committee (MPC) of the RBI to decide on interest rates, started on October 7 and will deliver its decision on October 9.
As per Moneycontrol’s poll of 12 bankers, economists and fund managers, the MPC is expected to keep the policy repo rate unchanged, as the growth-inflation risks have not yet turned dramatically. However, the expectation of a change in stance and an interest rate cut in the next quarterly monetary policy meeting in December gathers momentum.
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