Cash in banking system turns deficit, first time in over three years

Banking system liquidity slid to a deficit for the first time in over three years, squeezed by advance tax payments and ballooning government cash balances. The net liquidity injection was 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 surplus liquidity in the banking system was at Rs 8.03 lakh crore about a year ago.

This triggered speculation that the central bank may have to detail its liquidity management policy in the forthcoming monetary policy, pushing aside the commentary on interest rate increases, suggesting a possible shift in stance.

“Deficit banking system, though frictional, validates shift in policy strategy from accommodative to tight,” said Soumyajit Niyogi, director at India Ratings. “This will enable the MPC (monetary policy committee) to shift the policy stance to neutral from accommodative.”


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


“The RBI is likely to focus on longer-term variable rate repos to ease systemic liquidity with a lower likelihood of a reversal of the recent CRR (cash reserve ratio) hike,” said Aditi Nayar, chief economist at ICRA Ratings. “Some guidance on liquidity is likely to accompany the monetary policy outcome next week. While frictional stress related to tax outflows would ease going ahead, we are awaiting the data on durable liquidity to gauge whether that too has dropped.”

The overnight interbank call money rate, at which banks borrow and lend among one another, spiked as much as 5.85%, 45 basis points higher than the policy repo rate, now at 5.40%, show data from the Clearing Corporation of India. A basis point is 0.01 percentage point.

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

“RBI will eventually manage to keep interbank rates near the operative repo rate,” said Ashhish Vaidya, managing director at DBS Bank. “Removal of accommodation means tighter financial conditions, which point to rate hike and liquidity reduction as well.”

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

“Given the pressure on the rupee expected to continue along with inflationary forces, short-term rates are also required to stay elevated as a first line of defence,” Niyogi said. The rupee ended Wednesday at 79.98 against the dollar, down 0.28%, having weakened to 80.01 intraday.

Treasury bills and shorter-duration sovereign securities yielded 16-24 basis points higher in the primary market compared with last week.

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

Retail inflation as measured by the consumer price index accelerated to 7% in August versus 6.71% a month earlier, reviving fear of faster rate hikes to tame prices.

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