Front-loading of budgetary spending by the government has exacerbated an already persisting surplus liquidity in the system.
According to the Reserve Bank , there was also some moderation in the pace of increase in currency in circulation which is typical at this time of the year.
As against the increase of Rs 1.5 lakh crore during the first two months of 2017-18, it was Rs 43,600 crore and Rs 9,500 crore, during June and July, respectively.
Normally, currency returns to the banking system in these months and is reflected in a decline in currency in circulation. Consequently, the increase recorded this year reflects the sustained pace of remonetisation and the associated absorption of liquidity from the system.
Surplus liquidity of Rs 1 lakh crore was absorbed through issuance of Treasury Bills under the market stabilisation scheme and Rs 1.3 lakh crore through cash management bills on a cumulative basis so far this financial year.
Enduring surplus conditions warranted outright open market sales of Rs 10,000 crore each on two occasions in June and July. Another auction of an equivalent amount has been announced and will be conducted on August 10, 2017.
Apart from these operations, net average absorption of liquidity under the liquidity adjustment facility (LAF) was at Rs 3.1 lakh crore in June and Rs 3.0 lakh crore in July.
Reflecting this active liquidity management, the weighted average call rate firmed up and traded about 17 bps below the repo rate on average during June and July.
This was down from 29-32 basis points in March-April and 21 bps in May – within the LAF corridor, the RBI noted.