Intervention by RBI, festive demand lead to liquidity deficit

Mumbai: Banking system liquidity turned negative for the first time in a month, as intervention by the Reserve Bank of India (RBI) in the currency spot market drained system liquidity. Currency leakage in the festive season also shrank system liquidity, economists said.

System liquidity was in deficit for three consecutive days and the gap stood at Rs 52,299.7 crore, as of October 22.

“Foreign exchange intervention in the spot market is the main reason for the system liquidity to turn negative. A distant second reason is the pick-up in currency leakage. Government spending too, happened at the end of the month, which will also have an impact on the first week of November,” Gaura Sen Gupta, chief economist at IDFC First Bank told ET.


Currency leakage is the increase in physical currency held by the public, which reduces liquidity in the banking system.

Overnight rates were up amid deficit liquidity, quoting at 5.61% on average, 11 basis points above the repo rate, versus 5.47% the previous day, CCIL data showed.

The Reserve Bank conducted a 1-day variable rate repo (VRR) auction to infuse Rs 50,000 crore, and received bids of Rs 475 crores.The RBI will conduct another 3-day VRR auction for Rs 1.25 lakh crore on Friday.

Core liquidity decreased to Rs 3.45 lakh crore from Rs 4.7 lakh crore in the week of October 17. Of this, about Rs 20,000 crore was drained due to currency leakage on account of festive season demand.

System liquidity encountered a drain of Rs 1.5 lakh crore from interventions, Sen Gupta said.

The last time liquidity was in deficit was at the end of September, due to quarterly advance tax outflows. Average liquidity for September was in a surplus of Rs 1.47 lakh crore, while the average liquidity for October stands at Rs 1.11 lakh crore.