As liquidity tightens, RBI injects Rs 1 trn for largest infusion in 4 years

With the onset of corporate advance taxes leading to significant outflows from the banking system, the Reserve Bank of India on Thursday injected Rs 1.1 trillion into the system for the largest liquidity infusion in a day since April 24, 2019.

According to its data, the RBI injected net liquidity worth Rs 110, 772 crore into the banking system on March 16. Thursday’s injection of funds also marks the first time since April 24, 2019 that the RBI infused more than Rs 1 trillion into the banking system.

The tighter liquidity conditions resulted in a sharp rise in money market rates, with the interbank call money rate touching a high of 6.80 per cent, much above the repo rate of 6.50 per cent and higher than the MSF rate of 6.75 per cent. The MSF is the upper band of the interest rate corridor. A rise in the call rate implies a rise in banks’ borrowing costs.

The weighted average call rate (WACR) was at 6.65 per cent on Friday versus 6.52 per cent at previous close. WACR is the operating target of the RBI’s monetary policy and the central bank’s aim is to keep it in close alignment with the repo rate through liquidity operations.

Before March 15, the RBI absorbed funds from the banking system every day this month, taking in Rs 51,925 crore on an average. Given that absorbing funds reflects excess cash lying with banks, the latest data shows the degree to which the tax outflows have led to tighter liquidity.

“As of March 16, liquidity deficit widened to INR 1.1 trillion due to outflows related to advance tax payments. Further pressure on liquidity could build as we progress towards 20th which is the due date for GST payment,” said Gaura Sengupta, IDFC First Bank India economist.

The RBI’s injections include the quantum of funds banks have borrowed from the Marginal Standing Facility (MSF) window, the central bank’s variable rate repo operation, last week and borrowings through the Standing Liquidity Facility (SLF), traders said.

On March 10, banks borrowed Rs 82,650 crore through a 14-day variable rate repo auction held by the RBI. The latest borrowing through the MSF window was at Rs 8,664 crore while that through the SLF was at Rs 17,239 crore, the data showed.

“For system liquidity we also have to account for repo operations by RBI—the 14 day-repo—the MSF and CRR-covering,” a senior treasury official with a foreign bank said.

“Accounting for the sum that banks parked with the RBI through the Standing Deposit Facility (SDF), the banking system deficit is around Rs 25,000 crore, but next week along with the GST (goods and services tax) outflows, it could go to a deficit of around Rs 1 trillion,” the official said.

“Government expenditure tends to pick-up strongly towards the end of the month and especially in March. This should ease some pressure on overnight rates. Government cash balance as of February 24th is tracking at INR1.8 trillion,” IDFC First Bank’s Sengupta said.

“In FY24, we expect liquidity deficit to become more persistent based on our expectation of mild Balance of Payment Deficit and normal currency leakage which takes place during the year,” she said.

After a hiatus of five months, the RBI in February resumed variable rate repo operations in order to help banks tide over tightening liquidity conditions. Apart from the tax outflows towards the end of the financial year, redemption of pandemic-era repo operations worth a total of Rs 73,412 crore from March 17 to April 21 is seen exacerbating the pressure on liquidity.

From around Rs 7.4 trillion in April 2022, liquidity surplus in the banking system shrunk to Rs 1.6 trillion in December-January. The RBI has been withdrawing monetary accommodation since May 2022 to combat high inflation.