The Reserve Bank of India on Thursday injected Rs 1.1 trillion into the system, the highest liquidity infusion in a day since April 24, 2019, in response to the start of corporate advance taxes that have caused huge outflows from the banking sector.
A brief about RBI makes its highest infusion in four years of Rs 1 trillion as cash in 4 years
The RBI infused net cash into the banking sector on March 16 totaling Rs 110, 772 crore, per its records. The RBI injected more over Rs 1 trillion into the banking sector on Thursday for the first time since April 24, 2019.
The interbank call money rate reached a high of 6.80%, significantly higher than the repo rate of 6.50% and higher than the MSF rate of 6.75%, as a result of the tighter liquidity conditions. The upper band of the interest rate corridor is known as the MSF. The cost of borrowing for banks must increase if the call rate increases.
The weighted average call rate (WACR), which was 6.52 percent at the previous closure, was 6.65 percent on Friday. The WACR is the operating target of the RBI’s monetary policy, and the goal of the central bank’s liquidity operations is to maintain tight alignment between the WACR and the repo rate.
Before March 15, the RBI took money out of the banking system every day of the month, raking in an average of Rs 51,925 crore. The most recent data demonstrates the extent to which the tax outflows have resulted in tighter liquidity given that absorbing money reflects surplus cash lingering with banks.
“As of March 16, outflows associated with advance tax payments caused the liquidity shortfall to increase to INR 1.1 trillion. As the 20th, when the GST payment is due, approaches, additional strain on liquidity could increase, according to economist Gaura Sengupta of IDFC First Bank India.
According to traders, the RBI’s injections include the amount of money banks have borrowed from the Standing Liquidity Facility (SLF) and the Marginal Standing Facility (MSF) windows during the previous week’s variable rate repo operation.
On March 10, the RBI launched a 14-day variable rate repo auction in which banks were able to borrow Rs 82,650 crore. According to the data, the most recent borrowing through the MSF window was Rs 8,664 crore, while that through the SLF was Rs 17,239 crore.
A senior treasury officer with a foreign bank stated, “For system liquidity we also have to account for repo operations by RBI—the 14 day-repo—the MSF and CRR-covering.
“The banking system deficit is approximately Rs 25,000 crore when accounting for the amount that banks parked with the RBI through the Standing Deposit Facility (SDF), but next week with the GST (goods and services tax) outflows, it could go to a deficit of approximately Rs 1 trillion,” the official added.
“Towards the end of the month, and particularly in March, government spending tends to increase significantly. The pressure on overnight rates should diminish as a result. According to Sengupta of IDFC First Bank, the government’s cash balance as of February 24 was tracking at INR1.8 trillion.
According to her predictions of a minor balance of payments deficit and typical currency leakage throughout the year, “we expect liquidity deficit to become more persistent in FY24.”
The RBI restarted variable rate repo operations in February after a five-month hiatus to assist banks in navigating tightening liquidity conditions. The redemption of pandemic-era repo operations worth a total of Rs 73,412 crore from March 17 to April 21 is seen as aggravating the demand on liquidity, in addition to the tax outflows toward the close of the fiscal year.
The liquidity excess in the banking system decreased to Rs 1.6 trillion in December and January from over Rs 7.4 trillion in April 2022. To tackle excessive inflation, the RBI has begun reducing monetary accommodation since May 2022.