Informist, Monday, Jun 5, 2023
By Kasthuri Akhil and Nishat Anjum
MUMBAI – The Reserve Bank of India’s four-day variable rate reverse repo auction today saw higher participation from market participants than the 14-day auction held on Friday, as the shorter tenure would mean the money would be returned to them this week itself. The central bank is holding such auctions to bring down the excess liquidity of over 2 trln rupees in the banking system.
Out of the notified amount of 1 trln rupees, banks parked 666.40 bln rupees today. On Friday, banks parked only 508.68 bln rupees against the notified amount of 2 trln rupees. Both the times, the central bank accepted all bids at the highest possible rate of 6.49%.
Today, liquidity in the banking system was estimated to be in a surplus of 2.59 trln rupees, slightly higher from 2.40 trln rupees on Friday. The liquidity conditions did not change substantially over the weekend, so the RBI’s move to hold another liquidity mop-up operation surprised the market. Traders were in favour of holding liquidity well in excess because of outflows expected towards Jun 15 on account of advance tax outflows for Apr-Jun, dealers said.
The 14-day variable rate auctions are the RBI’s primary tool for managing liquidity in the financial system under its current liquidity management framework. In addition, the central bank conducts liquidity “fine-tuning” operations of shorter tenures, which includes the 4-day variable rate reverse repo operation.
Dealers attributed the low participation at Friday’s auction to a string of payments scheduled in June, which may lead to total outflows of about 2.3 trln rupees from the system. With the reversal of the 4-day reverse repo auction on Friday, banks were more comfortable with parking funds with the central bank for a shorter duration, well in time ahead of outflows scheduled on account of advance tax payments, dealers said.
“This is the quarter end (Apr-Jun), banks have a lot of disbursements due,” a dealer at a private bank said. “So, 14 days would have been difficult for banks to block their money.”
In the coming days, the surplus liquidity may narrow due to outflows on account of excise duty payments, dealers said. Outflows for payments for government as well as state government securities sold at weekly auctions may also weigh on the banking system liquidity during the month.
This week, outflows to the tune of 400-500 bln rupees are scheduled for excise duty payments, which banks will be able to meet from their current cash reserves even after parking funds with the central bank.
“Some banks that have surplus liquidity will use it to manage excise duty payments and tax-deducted at source outflows,” a dealer at a state-owned bank said. End
Edited by Ashish Shirke
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