Liquidity in the banking system slips to 6-month low

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Mumbai: Liquidity in the banking system has slipped into its deepest deficit in almost six months, inflating borrowing costs, as outflows due to corporate advance taxes and the Reserve Bank of India’s likely actions to stabilise the rupee have drained lenders of funds.

As of September 16, the RBI infused ₹68,785.94 crore into the banking system, the most since March 24, central bank data showed. An injection of funds by the RBI into the banking system indicates tight liquidity conditions.

An ET report last week said advance tax collections in the first half of this fiscal year have increased 20% on-year to ₹3.54 trillion.

“Advance taxes have gone out and GST is coming up, so there can be some tightness of liquidity. Having said that, in about 10 days or so, liquidity will be coming back into the system. In our view, the RBI would be happy with a liquidity range of say minus ₹50,000 crore to plus ₹50,000 crore from a broader perspective,” Indranil Pan, chief economist, Yes Bank, said.
“While the advance tax outflows and the GST are relatively normal factors where the flows will come back into the system, the bigger concern from a structural liquidity perspective is the currency sale by the RBI,” Pan said.

The rupee, which has been weakening versus the US dollar over the past couple of weeks due to higher crude oil prices, settled at a record closing low of 83.27 per dollar on Monday. The RBI is said to have been intervening in the currency market through dollar sales to curb excessive volatility in the exchange rate. Dollar sales by the central bank have caused a drain of rupee liquidity from the banking system.”The liquidity pangs would ease a tad by the end of this week, 23rd September 2023, as another 25% of the Incremental Cash Reserve Ratio (which is approximately INR 250-260 billion) would unfreeze and flow back into the system,” Achala Jethmalani, economist, RBL Bank said.”However, with the exchange rate reeling under pressure and the power-packed advanced economies’ central bank meets lined up for this week, the RBI would stay nimble footed on liquidity management,” she said.

The RBI last month had announced an Incremental Cash Reserve Ratio (ICRR) for banks to reduce excess liquidity in the banking system and therefore contain inflation risks. On September 8, the central bank said it would discontinue the ICRR and release the funds impounded in phases. The tighter liquidity conditions have pushed up the weighted average call rate (WACR), which is the operating target of the RBI’s monetary policy.

The WACR, which represents banks’ overnight cost of funds, closed at 6.82% on Monday, higher than the Marginal Standing Facility (MSF) of 6.75%. The MSF is the upper band of the RBI’s interest rate corridor.

The repo rate, which is the middle of the rate corridor, is currently at 6.50%.

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