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Informist, Friday, Sept. 5, 2025

 

By Vidhushi RajPurohit

 

MUMBAI – Liquidity infusion from the first tranche of cut in cash reserve ratio is unlikely to add to the liquidity in the banking system and expand credit growth as hefty outflows are lined up during the month, market participants said. Fundraising by banks is also seen high at the quarter-end, with a sizeable quantum of short-term debt papers maturing.

 

The first tranche of cash reserve ratio cut will release around INR 588 billion into the banking system when it is implemented in the fortnight beginning Saturday. Though the durable liquidity injection will be a welcome boost, asset liability managers are more worried about tax payments heading to the government through the month at regular intervals. Tax deducted at source and excise duty flows are scheduled next week while the third week of September will see advance tax and goods and services tax outflows. These will aggregate around INR 3.8 trillion, money market dealers said.

 

"There will be some relief for banks from the release of funds, but pressure will be there until there are month-end inflows (government spending in the last week)," a dealer at a private sector bank said. "Money market rates can also shoot up slightly later because of the outflows, but I do not see that sustaining for long as liquidity will not fall that sharply." The surplus liquidity in the banking system, as indicated by the Reserve Bank of India's net absorption of funds, was INR 2.87 trillion Thursday.

 

The central bank will cut the CRR by 100 basis points to 3% of banks' net demand and time liabilities in four tranches starting Sept. 6, Governor Sanjay Malhotra had said in the June Monetary Policy Committee's outcome. These tranches will add liquidity every four weeks until November-end. Based on the latest available data, total bank deposits as of Aug. 22 stood at INR 235.04 trillion, implying a total liquidity infusion of INR 2.35 trillion once the CRR cut is fully implemented.

 

The liquidity injection, however, comes amid a slew of outflows. Tax deducted at source and excise duty payments are set to begin Monday, with estimated outflows of INR 500 billion to INR 600 billion. These will be followed by corporate advance tax payments around Sept. 15, which will likely drain another INR 1.8 trillion, dealers said. Additionally, goods and services tax outflows later in the month are expected to drain about INR 1.5 trillion from the system.

 

The tightening of the systemic liquidity surplus will likely translate to money market rates, which will keep the weighted average rates anchored near the central bank's repo rate, dealers said. "We might see some VRR auctions this month if there is sharp surge in rates, but it (RBI) can skip that if WACR (weighted average call rate) is below repo," a dealer at another private sector bank said.

 

So far this month, the weighted average call market rate, which is the operating target for its liquidity operations, was in the range of 5.27-5.38%. The RBI last conducted a variable rate repo auction on Aug. 21.

 

Borrowing by banks through short-term debt is also expected to remain high in September due to high rollover requirement and rise in credit disbursal around the quarter-end, especially as the festival season begins, dealers said. Total outstanding certificates of deposit maturing in September stands at INR 363.40 billion, sharply higher than INR 193.3 billion in August. With the RBI freeing up capital for banks, some of the additional credit growth may not need to be funded by tapping the short-term debt market, some dealers said.

 

Anticipating a month of heavy fundrasing, most traders expect the CD rates to rise by 10-15 basis points, dealers said. Currently, the three-month rates for CD stands at 5.80-5.85%.

 

"...the corporates will draw down from the bank and pay to the government as advance tax. And plus quarter ending is also there in September. So, the CD rates will be higher in September," a dealer at a brokerage firm said.   End

 

Edited by Ashish Shirke

 

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