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The liquidity shortage in the banking system has shot up to over Rs 3 lakh crore, levels that experts say are the highest in many years.
The total amount of liquidity injected by the Reserve Bank of India (RBI) stood at Rs 3.15 lakh crore on January 23, as per data on its website. However, experts point out that adjusting for the gap in the maintenance of reserves by the banks, the deficit was a little over Rs 3.3 lakh crore.
“Persistent dollar sales to defend the currency as well as seasonal drivers, such as tax outflows, have magnified the squeeze in recent weeks,” said Radhika Rao, senior economist, DBS Bank.
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The RBI has stepped up the VRR or variable repo rate auctions to support banks which are grappling with a cash crunch. It is now conducting daily auctions.
According to Vivek Kumar, economist at Quanteco, along with other factors there has been a build up of government cash balances with the RBI.
“We expect government spending to pick up pace in the last quarter, both on the capital and revenue fronts and so some of this balance will be drawn down, easing the liquidity situation,” Kumar said.
Meanwhile, the yield on the 10-year benchmark bond fell two basis points to 6.71% on Friday and is down five points this week.
Bloomberg reported there were bond purchases by a ‘group that typically includes the central bank’ on Thursday triggering speculation that the authority bought notes. The likely purchases come amid reports that banks have requested the central bank in recent weeks to take stronger measures to ease tight liquidity conditions, the report said.
The cash squeeze has intensified since the second half of December with the average deficit reaching Rs 1.72 lakh crore and touching a high of Rs 2.4 lakh crore.
Anticipating a liquidity stress in the banking system, the RBI reduced the cash reserve ratio (CRR) to 4% of their net deposits in two equal tranches of 25 bps each with effect from the fortnight beginning December 14, 2024 and December 28, 2024. This released primary liquidity of about Rs 1.16 lakh crore into the banking system.
The daily VRR conducted by the RBI on Friday received strong response from the bank as they placed bids worth Rs 2.22 lakh crore against the notified amount of Rs 2 lakh crore. Apart from the daily VRR, the RBI also conducted a 14-day VRR auction on the same day to infuse Rs 1.75 trillion worth liquidity into the banking system. The auction received bids worth Rs 1.62 lakh crore from banks.
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