The Reserve Bank of India’s variable rate repo auction on May 19 is expected to ease the liquidity stress of some banks, money market dealers and experts said.
“This liquidity support by the RBI through repo auction will help address market concerns on liquidity and boost confidence that the RBI will intervene in the market, depending on the situation,” said Mahendra Kumar Jajoo, chief investment officer – fixed income, at Mirae Asset Investment Managers (India).
The RBI infused Rs 46,790 crore through a 14-day variable rate repo auction at a cut-off rate of 6.51 percent, just over the repo rate, on May 19.
The banking system had a surplus of Rs 87,580.91 crore, as per the RBI’s money market operation data as of May 18. Dealers attributed this infusion to the uneven distribution of liquidity among market participants.
“In the last one week, liquidity has improved by Rs 50,000 crore in the system and with today's repo auction, it will further enhance the systemic liquidity, which will be reflected in call rates softening, which we see has started to go down,” said Ajay Manglunia, managing director of JM Financial.
The call money rate is the rate at which banks lend or borrow short-term funds to and from each other.
On May 20, government securities worth Rs 66,165 crore is due for redemption.
On the other hand, goods and services tax (GST) outflows worth around Rs 1.5 lakh crore is also expected. This will further stress on the liquidity conditions in the banking system.
In April, the gross GST revenue collected stood at Rs 1,87,035 crore of which CGST is Rs 38,440 crore, SGST was Rs 47,412 crore, IGST was Rs 89,158 crore (including Rs 34,972 crore collected on import of goods) and cess was Rs 12,025 crore (including Rs 901 crore collected on import of goods).
Similarly, The gross GST revenue collected in the month of March was Rs 1,60,122 crore.
Also read: GST collections for April scale record high of Rs 1.87 lakh crore
Liquidity stress
Despite surplus liquidity in the banking system over the past few weeks, call money rates shot up and remained above the RBI’s repo rate of 6.50 percent. This was because some banks faced liquidity stress and funds commanded a higher rate in the inter-bank market.
The weighted average call money rate remained in the range of 6.55 percent to 6.79 percent between April 18 and May 16, according to Bloomberg data. This was above the repo rate and close to the marginal standing facility rate of 6.75 percent.
Usually, when liquidity in the banking system is in surplus, call money rates are marginally below the repo rate. While call money rates in the past two days remained at or below the repo rate, the weighted average three-day call money rate is trading at 6.3875 percent.
RBI’s take on liquidity
RBI governor Shaktikanta Das said during the April monetary policy that the central bank will be flexible in meeting the productive needs of the economy through two-way operations.
“We will also ensure the completion of the government borrowing programme in a non-disruptive manner while maintaining orderly market conditions during 2023-24,” Das said.
Since then, the RBI conducted a 13-day variable rate reverse repo auction on April 21 and a 15-day variable rate reverse repo auction on May 4, removing excess surplus liquidity of Rs 20,480 crore and Rs 8,447 crore, respectively.
Also read: Call money rate rises to 4-year high at over 8% on last day of financial year
Outlook
Dealers are of the view that the RBI’s liquidity infusion will help call money rates remain within the liquidity adjustment facility (LAF) corridor.
“Call money rates have already aligned with the monetary policy corridor and with this injection, it will help to remain within the LAF corridor,” Jajoo said.
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