Informist, Tuesday, Sep 17, 2024

NEW DELHI – Liquidity surplus in the banking system fell to its lowest since Jun 27 on Monday, according to data from the Reserve Bank of India. While this was due to payments made for advance tax in the middle of the month, systemic liquidity is expected to tighten further and may fall into deficit as nearly 1.5 trln rupees is seen flowing out on account of Goods and Services Tax for September.

As per RBI data released today, the net liquidity absorbed by the central bank on Monday fell to 221.53 bln rupees from 1.35 trln rupees on Sunday.

Outflows due to advance tax payments for the September quarter have drained over 1.25 trln rupees from the banking system since Friday, market participants said, after robust post-election spending from the government pushed liquidity into surplus for over two months. Until Sunday, the daily liquidity surplus in September had remained above 1 trln rupees.

Kotak Mahindra Bank's economists estimate the government's cash balance fell to 1.5 trln rupees in the week ended Sep 6 and rose by around 600 bln rupees last week. They had expected the government's expenditure to offset some of the tax outflows.

"This week, however, we expect liquidity to tighten significantly to near-neutral levels, given outflows related to GST towards the end of the week," Kotak Mahindra Bank said in a note Monday.

The overnight Mumbai Interbank Offer Rate, the benchmark for overnight rates, has been set at 6.70% or higher since Friday – above the repo rate of 6.50%. Tighter liquidity conditions will also drive short-term government bonds out of favour over the next week and until the Centre begins its usual spending at the end of the month, bond market dealers said.

In August, Governor Shaktikanta Das had said the RBI would remain "nimble and flexible in liquidity management" to ensure money market rates evolve in an orderly manner. On Friday, the central bank said it would hold a three-day variable rate repo operation for 1 trln rupees today – the first such fine-tuning operation since June. However, banks did not pick up the entire amount at the auction. This, according to market participants, was due to the repo transaction maturing before GST outflows begin on Friday.

"Banks have built up a buffer at the auction, but why would they hold it before GST outflows begin?" the head of asset-liability management at a private bank said. "Going into (system liquidity) deficit is a close call, and will depend on government spending. Over the last two months, it has been spending its post-election pileup from 20th (of the month) itself." End

Reported by Aaryan Khanna

Edited by Ashish Shirke

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