In the first variable rate repo (VRR) auction of the calendar year 2024, conducted by the Reserve Bank of India (RBI) on Friday, there was high demand for liquidity, with banks putting in bids aggregating ₹2,77,402 crore against the notified amount of ₹1-lakh crore.

This shows that the liquidity deficit continues in the banking system. As of January 4, the system liquidity deficit was ₹1.10-lakh crore.

However, this situation could ease somewhat due to the maturity of some government Securities towards the end of this month and the expected pickup in government spending, say market experts.

System liquidity

System liquidity, as measured by the net position under the liquidity adjustment facility (LAF), turned into deficit mode for the first time in September 2023 after a gap of nearly four and a half years since May 2019, RBI Governor Shaktikanta Das said in his December 2023 monetary policy statement.

The central bank allotted liquidity aggregating ₹1,00,009 crore at the VRR auction. The weighted average rate at the 7-day auction was 5 basis points lower at 6.69 per cent vis-à-vis the previous auction’s 6.74 per cent.

India Ratings and Research (Ind-Ra), in a report, noted that the liquidity in the banking system was in deficit in December 2023.

The net deficit in banking system liquidity crossed ₹2.5-lakh crore in the last week of December owing to back-to-back advance tax payments and monthly GST payments.

Ind-Ra said it continues to expect the liquidity condition to improve meaningfully from January 2024, owing to a surge in government spending ahead of the vote on account.

Moreover, foreign portfolio investment flows in the equity and debt markets surged in December 2023, clocking a multi-year high of ₹10-lakh crore in a month.

“The RBI started conducting VRR auctions from December 15, 2023, to alleviate liquidity tightness in the banking system. However, there will be inflows into the banking system due to maturing government Securities later this month. So, RBI may reduce the amount of liquidity it offers under VRR auction,” said Marzban Irani, Chief Investment Officer, Fixed Income, LIC Mutual Fund.