Banking system liquidity surplus touches Rs 1 trn, shows RBI data

While liquidity in the banking system has turned surplus in the last few weeks, it could go back to deficit again, mainly due to corporate advance tax outflows.

The net liquidity surplus of the banking system rose to touch Rs 1 trillion on Tuesday on the back of government spending, according to the data released by the Reserve Bank of India.

Analysts, however, said that the liquidity is expected to fall into deficit mode soon on the back of tax outflows.

On Monday, liquidity surplus stood at Rs 89,450 crore.

“The liquidity improved because of government expenditure.

"In the near term we have excise tax outflow and advanced tax outflow and GST outflow, because of which the liquidity is expected to be incrementally tighter,” said Gaura Sen Gupta, economist at IDFC First Bank.

Liquidity conditions, which had been in surplus over the past two months, have tightened recently due to GST outflows, a likely negative BoP balance for the quarter, and increased intervention by the RBI in the foreign exchange market.

Foreign exchange market participants said that the RBI conducted a buy/sell dollar-rupee swap worth $3-$5 billion of tenure nine months -12 months in the forwards market during the previous week, which further aided the rupee liquidity.

“The RBI has been conducting a buy/sell swap of 9-12-month maturity to support rupee,” said Amit Pabari, managing director at CR Forex.

“They have short positions in the NDF market also,” he added.

In a buy/sell swap transaction, the RBI purchases dollars while contracting to sell them at a future date.

When RBI buys dollars, it injects rupee liquidity in the system.

On the other hand, RBI has been selling dollars in the spot market which has contributed to liquidity crunch in the past few weeks.

While liquidity in the banking system has turned surplus in the last few weeks, it could go back to deficit again, mainly due to corporate advance tax outflows.

Analysts said to address the liquidity situation, the RBI may consider various measures, including money market operations, like a reduction in the banks’ cash reserve ratio requirements.

“The upcoming outflow of advance tax collections around mid-month is likely to widen the deficit anew.

"Hence, authorities might explore available options, including either relying on money market operations or choosing an alternative between a (permanent injection via) CRR cut, or buy-sell swaps as a sterilisation tool.

"We see a little more than even probability of a 25bp cut in the CRR (outside chance of 50bp),” said DBS bank in a note.

Most economists said the Reserve Bank of India’s Monetary Policy Committee is expected to start cutting rates in February next year.

However, the domestic rate setting panel stands in a tough spot with inflation rising and growth moderating more than expected.

“We expect two repo rate cuts of 25bp over February and April, taking the repo rate to 6 per cent.

"Our real rate math suggests that this will be a shallow rate cutting cycle of 50bp.

"But even before that, the RBI may infuse domestic liquidity, via a possible 50bp CRR cut on 6 December - and over the next few months, also bring out a host of other instruments to infuse the necessary liquidity. It's time to act, strategically,” said HSBC in a note.