Banks seek funds amounting to 2.43 times the notified amount at 7-day VRR auction

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In an indication of the extent of liquidity deficit in the banking system, banks placed bids seeking injection of funds amounting to 2.43 times the notified amount of ₹1.75-lakh crore in the 7-day variable rate repo (VRR) auction conducted by the Reserve Bank of India on Friday.

While banks placed bids aggregating ₹4,25,154 crore (against the notified amount of ₹1.75 lakh crore), the central bank allotted 7-day funds aggregating ₹1,75,013 crore in the auction at a higher weighted average rate (WAR) of 6.70 per cent against last Friday’s 6.63 per cent.

The higher WAR clearly shows the pressing need for funds by banks.

Ajay Manglunia, MD and Head, Investment Grade Group, JM Financial, attributed the liquidity deficit in the banking system to credit growth outpacing deposit growth, outflows on account of  quarterly advance tax and monthly Goods & Service Tax (GST) payments, and banks subscribing to State government Securities, Treasury Bills and government securities at auctions.

Government spending

He expects banking system’s liquidity to normalise once the government starts spending the money it received via advance tax and GST payments and auctions.

“Liquidity has tightened considerably with net injection of ₹1.43-lakh crore yesterday. The total liquidity deficit after including the ₹1-lakh crore of VRR (conducted last Friday), which was redeemed today, was ₹2.58-lakh crore,” said Madan Sabnavis, Chief Economist, Bank of Baroda.

Clearly, the buoyant advance tax payments has put pressure on liquidity, he added.

Sabnavis underscored that liquidity deficit will persist until such time the government spending picks up. This can be expected towards the end of the month when individual ministries will strive to meet their targets.

At any rate, stringent liquidity conditions can be expected with credit growth being higher than deposits and the RBI following its stance of withdrawal of accommodation, he opined.

“It will be interesting to see if there is any OMO (open market operation) purchase (of government securities) as that can inject permanent funds into the system. No mention was made in the policy however on this tool being used.

“Interestingly there is still around ₹50,000 crore going into SDF (standing deposit facility) reflecting surpluses with some banks,” Sabnavis said.