bank in india: the liquidity of the banking system becomes deficient, for the first time in more than three years

The liquidity of the banking system fell into deficit for the first time in more than three years, due to the effect of advance tax payments and soaring government cash balances. Net cash injection stood at Rs 21,873.43 crore on Tuesday, bucking the trend of a surplus for the first time since May 2019, according to Reserve Bank of India (RBI) data compiled by India Ratings. . Net excess liquidity in the banking system was Rs 8.03 lakh crore about a year ago.

This sparked speculation that the central bank may have to detail its liquidity management policy in the next monetary policy, brushing aside commentary on interest rate hikes, suggesting a possible shift in stance.

“The loss-making banking system, although frictional, validates the shift in policy strategy from accommodative to strict,” said Soumyajit Niyogi, head of India Ratings. “This will allow the MPC (monetary policy committee) to change the policy stance from neutral to accommodative.”

After a review of liquidity conditions, the RBI on Wednesday decided to conduct an overnight variable rate repo (VRR) auction on Thursday to inject liquidity into the banking system. ET had reported on September 19 that the RBI was likely to hold a pension auction. The central bank will announce its monetary policy on September 30.

“The RBI is likely to focus on longer term floating rate repos to ease systemic liquidity with less likelihood of reversing the recent rise in the CRR (cash reserve ratio),” Aditi Nayar said. Chief Economist at ICRA Ratings. “Some indications on liquidity should accompany the monetary policy outcome next week. While frictional stress from fiscal outflows would ease going forward, we are awaiting data on sustainable liquidity to assess whether this- it has also decreased.

The overnight interbank rate, at which banks borrow and lend to each other, climbed to 5.85%, 45 basis points higher than the repo rate, now at 5.40 %, according to data from the Clearing Corporation of India. One basis point is 0.01 percentage point.

The weighted average rate (WAR) in the interbank call market was 5.72% compared to 5.17% last Thursday and 5.20% on Friday, reflecting a rise of more than half a percentage point.

“RBI will ultimately succeed in keeping interbank rates close to the operational repo rate,” said Ashhish Vaidya, Managing Director of DBS Bank. “Removing housing means tighter financial conditions, which also points to higher rates and less liquidity.”

The weighted average rate (overnight) in the tri-party repo market (TREP) increased by 5.74%. The weighted average rate closed at 5.65% against 5.30% on Thursday against 5.27% on Friday last week. Banks, bond houses, corporations, insurance companies and mutual funds can participate on this platform.

“Given the pressure on the rupiah which is expected to continue alongside inflationary forces, short-term rates must also remain elevated as a first line of defense,” Niyogi said. The rupee ended Wednesday at 79.98 against the dollar, down 0.28%, after weakening to 80.01 intraday.

Treasuries and shorter duration sovereign securities yielded 16 to 24 basis points more in the primary market compared to last week.

“Once the repo rate hits 6%, the MPC might change the stance to neutral, in sync with the upper inflation tolerance level,” Niyogi said.

Retail price inflation as measured by the consumer price index accelerated to 7% in August from 6.71% a month earlier, reigniting fears of an acceleration in rate hikes to tame price.

RBI Governor Shaktikanta Das had mentioned being vigilant on the liquidity front in the August policy.

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