This move by the RBI aims to stabilize liquidity levels amidst the anticipated drain due to tax payments, ensuring banks have enough funds to smoothly navigate the financial landscape.
The Reserve Bank of India (RBI) injected a hefty sum of Rs 75,000 crore into the banking system through a Variable Rate Repo (VRR) auction to bolster liquidity ahead of the anticipated outflow due to GST and Advance Tax payments. These payments, estimated at nearly Rs 2.5 trillion, are expected to strain liquidity levels in the banking sector. Banks are gearing up for the outflow, with Advance Tax payments of around Rs 1 trillion due on March 15 and GST payments of approximately Rs 1.5 trillion due on March 20.
“The RBI’s move aims to ensure ample liquidity in the system,” mentioned a treasury head from a public sector bank. “We might witness another VRR auction next week,” he added. The VRR auction on Friday attracted bids worth Rs 76,560 crore from banks, with the RBI accepting bids at a rate of 6.52%, lower than the marginal standing facility rate of 6.75%. This auction provides banks with the opportunity to obtain overnight liquidity through the RBI’s marginal standing facility.
With the recent surplus in systemic liquidity, aided by government spending, the RBI has been conducting Variable Rate Reverse Repo (VRRR) auctions. However, in anticipation of an impending liquidity crunch, the RBI opted for VRR auctions this time, as explained by Deepak Sood, senior partner at Alpha Alternatives.
Over the past months, call money rates, the rates at which banks lend to each other overnight, have seen a decline. In February, the weighted average of the call money rate approached the repo rate, marking a shift from the previous months where it stood about 15 points higher than the benchmark.
The banking system’s liquidity situation has transformed significantly, moving from a severe shortage to excess liquidity in just one month. As per the latest RBI data, the banking system witnessed a surplus of Rs 13,377 crore on March 13 and Rs 29,817 crore on March 14.
This move by the RBI aims to stabilize liquidity levels amidst the anticipated drain due to tax payments, ensuring banks have enough funds to smoothly navigate the financial landscape.
In conclusion, RBI’s infusion of Rs 75,000 crore through VRR auctions aims to bolster banking system liquidity ahead of significant outflows from GST and Advance Tax payments. Banks are preparing for the impact, with Advance Tax payments of Rs 1 trillion due on March 15 and GST payments of approximately Rs 1.5 trillion due on March 20. The auction, held at a rate of 6.52%, seeks to provide overnight liquidity to banks amidst changing liquidity scenarios, as indicated by recent data from the RBI.
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