The Reserve Bank of India (RBI) received bids aggregating ₹3.08-lakh crore for allotment of funds from banks against the notified amount of ₹2.50-lakh crore at the 15-day variable rate repo (VRR) auction on Thursday in the backdrop of tight liquidity in the banking system.

The banking system’s overall liquidity deficit rose to ₹3,46,367 crore on January 24 against ₹3,33,961 crore on January 23 and ₹1,28,794 crore as on January 1. 

The central bank allotted liquidity aggregating ₹2,50,010 crore to the bidders (banks) at a weighted average rate of 6.73 per cent.

“As on January 24, system liquidity deficit was near an all-time high of ₹3.5-lakh crore (without adjusting for daily cash reserve ratio/CRR imbalances) on account of GST (goods & service tax) payments. Conditions will likely ease this week on account of government security (G-Sec) redemption of ₹59,532 crore (on January 28),” Nuvama Wealth Management said in a report.

Tight liquidity

RBI Governor Shaktikanta Das, in his December 2023 monetary policy statement, noted that 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.

“The overall tightening of liquidity conditions is attributed mainly to higher currency leakage during the festive season, government cash balances and Reserve Bank’s market operations….Going forward, government spending is likely to further ease liquidity conditions. On our part, the Reserve Bank will remain nimble in liquidity management,” Das then said.

India Ratings and Research (Ind-Ra), in a report, said banking liquidity has been under stress for more than a quarter due to (i) higher cash withdrawal led by the festival demand and (ii) a moderation in government spending. 

The rating agency had expected the liquidity conditions to improve meaningfully from January 2024, owing to (i) backloading of revenue expenditure and (ii) an increase in government spending after the supplementary demand for grants, involving an additional cash outgo of ₹58,380 crore, was brought in by the union government in December 2023.

“On the contrary, there could be a moderation in government spending if the government wants to keep its fiscal deficit at 5.9 per cent of GDP in FY24. This is because nominal GDP growth, as per National Statistical Office’s (NSO) estimate, is expected to be 8.9 per cent against the budgeted 10.5 per cent,” Ind-Ra said.

Meanwhile, the RBI said it will conduct a 2-day VRR auction to infuse liquidity amounting to ₹25,000 crore into the banking system.