2024-11-22 19:25:00
Surplus liquidity in the banking system shrank to ₹84,154.75 crore due to monthly GST outflows. This is akin to a fine-tuning exercise to manage call rates near the repo rate, as monthly tax outflows drew surplus liquidity out of the banking system, money market experts said.
The RBI injected funds worth ₹25,000 crore via a variable rate repo auction (VRR) to ensure that recent overseas outflows from local debt and equity do not drive up banks’ cost of funds, analysts said. This is the second such auction that the RBI has conducted post its change in stance to neutral from withdrawal of accommodation.
On Thursday, surplus liquidity – as measured by absorption of funds by the RBI – dropped to a one-month low of ₹84,154.75 crore, central bank data showed.
“The RBI has been very flexible and quick to manage liquidity. I am also expecting some VRR auctions to happen around mid December when there are advance tax outflows,” said Vikas Goel, MD and CEO at PNB Gilts. “The RBI wants to keep durable liquidity positive and roughly about 1% to 1.2% of NDTL, to make sure that the call rates don’t move away from the repo rate,” he said.
In the auction on Friday, the RBI received bids worth ₹35,420 crore from banks versus the notified amount of ₹25,000 crore, reflecting the need for funds from lenders.So far in November, the rupee has weakened nearly 0.5% to 84.45/$1 and foreign investors have sold $4 billion from Indian stocks and bonds, depository data showed. Likely intervention by the RBI has capped the rupee from depreciating further, currency dealers said.
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How might the anticipated advance tax outflows in December affect the RBI’s liquidity management strategies moving forward?
**Interview with Vikas Goel, MD and CEO at PNB Gilts**
**Interviewer:** Thank you for taking the time to speak with us, Vikas. Recently, the Reserve Bank of India (RBI) made headlines by injecting ₹25,000 crore into the banking system via a variable rate repo auction. What do you think prompted this move?
**Vikas Goel:** Thank you for having me. The RBI’s decision was primarily to address the widening liquidity deficit we’ve been seeing in the banking system. The weighted average call rate had risen significantly, which indicated an unusual strain in the short-term borrowing costs. By injecting liquidity, the RBI aims to stabilize these rates and ensure that banks can maintain their operational efficiency without experiencing spikes in funding costs.
**Interviewer:** There has been some discussion about liquidity levels, particularly with the surplus liquidity shrinking to ₹84,154.75 crore. What factors do you think contributed to this decline?
**Vikas Goel:** Yes, the decrease in surplus liquidity can largely be attributed to the monthly GST outflows. These outflows tend to draw liquidity from the system, affecting the overall balance. It’s a typical occurrence, and in this instance, it pushed the RBI to act. They want to keep the call rates close to the repo rate, and this injection was part of their fine-tuning strategy to manage liquidity more effectively.
**Interviewer:** This was the second VRR auction following the RBI’s shift in stance to a neutral position. How do you foresee the RBI’s approach evolving in the coming weeks?
**Vikas Goel:** I expect the RBI to continue being proactive in managing liquidity. With the advance tax outflows expected around mid-December, we might very well see additional VRR auctions to ensure that liquidity remains adequate. The central bank is focused on keeping durable liquidity positive, ideally at around 1% to 1.2% of the Net Demand and Time Liabilities (NDTL), which reflects their commitment to maintaining market stability.
**Interviewer:** Great insights, Vikas. To wrap up, how do you think these measures will impact the Indian economy in the short term?
**Vikas Goel:** In the short term, the RBI’s liquidity support should help stabilize the financial markets and limit any potential increases in borrowing costs for banks, which is crucial for sustaining economic growth. If the banks can lend more confidently, it supports business investments and consumer spending, both of which are vital for economic growth. a well-managed liquidity framework enhances investor confidence, which is good for the economy.
**Interviewer:** Thank you for your thoughts, Vikas. It will be interesting to see how these dynamics unfold in the coming weeks.
**Vikas Goel:** Thank you for having me!