Liquidity deficit in banking system to continue in near term, say experts

Liquidity in the banking system liquidity is likely to remain in a deficit mode in the near term, which could lead to elevated short-term borrowing rates, at least till September end, experts said.

The Reserve Bank of India (RBI) injected Rs 1.15 trillion through the marginal standing facility (MSF) and the standing deposit facility (SDF) available to banks on Wednesday.

According to Madan Sabnavis, chief economist at Bank of Baroda, ever since the imposition of 10% incremental-CRR by the RBI in August, there has been a pressure on systemic liquidity. The liquidity deficit hit `1.15 trillion on Wednesday, after rising to a four-year high of Rs 1.46 trillion on September 18.

High advance tax outflows, combined with GST outflows towards the end of the current month, have further added to the liquidity pressure, Sabnavis said. The overnight call money rate and TREPS rate, accordingly, stood at 6.76%-6.77% on Wednesday, up 27 basis points (bps) than the repo rate.

‘Liquidity will be largely in deficit, or moderate surplus, given the flow of deposits and credit. Also RBI could be selling dollars thus absorbing rupees,’ Sabnavis said.

A treasury head at a small sized private bank said release of 25% of the impounded I-CRR will take place on September 23, and the expected government spending should also aid in reducing system deficit. Another Rs 18,000 crore of capital is expected to be released back to banks at the maturity of the variable rate reverse repo (VRRR) auctions on Friday, they said.

‘With weakening of the Indian rupee, any intervention in the spot market (by RBI) will certainly delay the eventual return to neutral or positive (systemic liquidity). The pace of government spending will be a key factor for liquidity remaining in protracted deficit mode,’ the banker said.

According to Venkatakrishnan Srinivasan, founder of Rockfort Fincap LLP, a financial advisory firm, systemic liquidity will likely ease out gradually in coming days and return to surplus soon. If necessary, the RBI shall intervene with additional tools to manage the liquidity situation, he said, adding that the regulator has been managing liquidity situation effectively without conducting variable rate repo auction till date.

‘RBI has been managing liquidity with MSF (marginal standing facility) continuously. If required they may conduct VRR auction to infuse additional liquidity. They have additional tools like OMO (open market operations) purchase to infuse liquidity,’ he said.