The banking system, after enjoying a liquidity surplus for over two months, is expected to move into deficit this week due to advance tax payments and GST outflows, according to market experts. As of Thursday, the liquidity surplus stood at Rs 1.96 trillion, based on data from the RBI.
"The liquidity will dip into deficit following the advance tax payments and GST outflows. However, we expect a rebound in October with government spending," said the chief economist at Bank of Baroda.
In August, liquidity in the banking system remained in surplus, ranging from Rs 1.46 trillion to Rs 2.86 trillion, prompting the RBI to conduct several variable-rate reverse repo (VRRR) auctions to manage the surplus. On August 4, the liquidity surplus hit a year-high of Rs 2.77 trillion, bolstered by government spending.
Despite the anticipated liquidity dip, bond market participants predict minimal impact on short-term bond yields. This optimism stems from the cancellation of treasury bill auctions in September, which has kept short-term bonds in demand. A state-owned bank dealer noted that the RBI remains vigilant in managing liquidity, balancing both infusion and withdrawal as needed.
Further market attention is focused on the upcoming US Federal Reserve meeting, where traders anticipate a rate cut that may provide additional guidance for domestic markets.
In August, the average liquidity surplus was Rs 1.49 trillion, up from Rs 1.02 trillion in July. Over the past year, the average surplus stood at Rs 0.49 trillion. An industry expert highlighted that the RBI is likely to continue managing liquidity carefully, ensuring rates remain stable despite fluctuations in surplus levels.
The surplus liquidity led the weighted average money market rate to hover just below the repo rate of 6.50%. On Friday, the money market rate settled at 6.47%. Throughout August, the weighted average call rate (WACR) remained close to the repo rate, supported by the RBI’s liquidity operations.
Despite the surplus, certificate of deposit (CD) issuances surged by 22% in August due to sluggish deposit growth. Market participants predict that as liquidity shifts to deficit, banks may seek to raise funds through short-term debt instruments to bridge the gap between assets and liabilities. CD issuances in August reached Rs 82,020 crore, up from Rs 67,160 crore in July.
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