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Informist, Tuesday, Sept. 16, 2025

 

By Shravani Chandiwade

 

MUMBAI – Banks decided to almost entirely forego the Reserve Bank of India's liquidity support Tuesday, calling it unnecessary at a time when a healthy liquidity surplus still exists in the financial system. At its three-day variable-rate repo auction of INR 750 billion on Tuesday, banks borrowed only INR 5.85 billion from the RBI.

 

"The dull subscription itself shows how, for the time being, the auction was unnecessary," a dealer at a state-owned bank said.

 

The net liquidity absorbed by the RBI, a proxy for the liquidity surplus in the banking system, fell to INR 1.90 trillion Monday from INR 2.66 trillion Sunday due to advance tax outflows. Regardless, banks were already flush with cash Monday from the return of INR 1.50 trillion parked with the RBI under a three-day variable rate reverse repo auction on Friday. This kept the weighted average call rate anchored near the repo rate on Monday.

 

Dealers said the weak response at the auction was also due to lower borrowing costs in the tri-party repo market, which was at 5.41% compared with the minimum bid of 5.51% at the auction. With the RBI's recent tight leash on curbing liquidity in the hands of banks, money market traders had anticipated a short-term variable rate reverse repo auction to lock up liquidity until goods and services tax outflows began on Friday or Saturday.

 

"Given the liquidity surplus in the banking system, a variable-rate repo auction was unexpected," a dealer at a private-sector bank said.

 

To be sure, the RBI's pre-emptive move ensured the market saw it as a signal from the central bank that it stands ready to provide liquidity support if overnight money market rates rise due to the tax outflows. Some of the seasonal liquidity tightness had also been countered by the central bank's phased cash reserve ratio cut announced all the way back in June.

 

The first tranche of a four-part cash reserve ratio cut came into effect in the fortnight that began Sept. 6, bringing it to 3.75% of banks' net demand and time liabilities from 4.00?rlier. The other tranches of the cumulative 100 basis point cut will add durable liquidity to the system every four weeks. For the current fortnight ending Sept. 19, banks have to maintain a daily cash reserve of INR 9.04 trillion with the central bank, down from INR 9.63 trillion the previous fortnight.

 

"With such low cash reserve ratio requirements and lack of significant outflows, the market did not see the variable rate repo auction coming," a dealer at a private-sector bank said.

 

The GST outflows alone are expected to drain around INR 1.8 trillion from the banking system, which, if unmitigated, may push call money and triparty repo rates above the policy repo rate of 5.50%, dealers said. Bankers said they expect the RBI to conduct another short-term variable rate repo auction on either Thursday or Friday to ease the tightness in the money market as the tax outflows take place, with the auctions potentially maturing on Monday or Tuesday. For the next week, the RBI is unlikely to conduct any variable rate reverse repo operations and may avoid a seven-day operation this week, they said.  End

 

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Edited by Saji George Titus

 

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