Banks showed high demand for cash by bidding Rs 1.6 trillion in the Reserve Bank of India’s (RBI) variable rate repo (VRR) auction, held on Friday, against a notified amount of Rs 1 trillion. This comes amid a period of tight liquidity, with banks borrowing at a weighted average rate of 6.62%.
Temporary Liquidity Tightness
The head of treasury at a public sector bank indicated that this liquidity tightness is expected to be temporary, with improvements anticipated in the coming weeks due to increased government spending.
Liquidity Trends in June
The banking system experienced a liquidity surplus at the beginning of June, with Rs 30,000 crore on June 3 and Rs 50,000 crore on June 4. However, by mid-June, liquidity had shifted to a deficit, reaching Rs 64,500 crore on June 16 and rising to Rs 98,612 crore on June 17. The deficit intensified to Rs 1.5 trillion by June 19.
RBI’s Liquidity Strategy
A senior bank official noted that the RBI aims to maintain system liquidity in deficit mode to avoid excess liquidity. This strategy was influenced by a significant cash squeeze in May, attributed to lower government spending during the general elections.
May’s Cash Squeeze and Relief Measures
The liquidity deficit in May exceeded Rs 1 trillion, peaking at Rs 2.32 trillion on May 23. To alleviate this, the RBI infused nearly Rs 9 trillion into the banking system through 11 VRR auctions, the highest amount in the current calendar year.
Banks’ Response
In response to the rising deficit in May, banks increased their issuance of certificates of deposit (CDs), raising over Rs 50,000 crore compared to Rs 32,860 crore in April.
Understanding Repo Auctions
Repo auctions conducted by the central bank are a mechanism to inject liquidity into the banking system, allowing banks to obtain overnight liquidity through the RBI’s marginal standing facility when interbank liquidity is insufficient.