Liquidity conditions may remain easy for about 4 months

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Overall liquidity conditions will remain easy, with bank deposits likely to increase by ₹2 crore due to the return of ₹2,000 worth of notes, until cash demand picks up during the festive season starting in October, according to experts.

VRRR auctions are likely

Therefore, there may be further decline in money market rates in the short term, said Pankaj Pathak, Fixed Income Fund Manager, Quantum Mutual Fund. There was an expectation that the Reserve Bank of India (RBI) would announce measures to absorb excess liquidity. The Reserve Bank of India (RBI) has acknowledged that the deposit of the 2,000-rupee note will add to the already high liquidity surplus in the banking system. However, they chose not to use any solid liquidity absorbent to reduce excess liquidity. Instead, they will likely conduct variable rate reverse repo (VRRR) auctions for various periods to temporarily absorb excess liquidity,” Pathak said.

Referring to the banking system which has witnessed an influx of liquidity over the past month, he said, “The major contributors to this increase in excess liquidity are the maturities of government bonds to the tune of ₹1 crore, RBI’s purchase of foreign exchange and deposits of ₹2,000 notes.”

The Economic Research Division of the SBI, in a report, noted that the liquidity surplus in the system has increased again with net liquidity adjustment facility absorption at ₹2.2 crore on June 7 from an average of ₹1 crore in April-May 2023.” The government’s surplus cash balances also started to decline from the third week of May.Even the deposit of $2,000 notes in banks has added to the liquidity… About 85 per cent of the $2,000 notes are deposited in bank accounts and are not exchanged for smaller denominations .

Thus, bank deposits are likely to increase by at least ₹ 2 lakh crore assuming some notes will already be with the banks in currency funds. Total deposit growth in FY24 should grow by over 11 per cent year-on-year. The SBI economists said this would effectively mean that a wave of increases in deposit rates may be a thing of the past.