According to statistics released on Wednesday, the liquidity gap in India’s banking system reached a record high due to withdrawals for tax payments and reduced government expenditure. As a result, traders are expecting the central bank to inject additional funds to make up the difference.
According to figures from the Reserve Bank of India (RBI), the deficit nearly tripled from the beginning of the month to Rs 3.34 trillion ($40.18 billion) as of Jan. 23.
According to A Prasanna, head of research at ICICI Securities Primary Dealership, “the widening in deficit is a combination of rise in tax collections and a slowdown in government spending, which has been seen in the last few months.”
Indian lenders have requested the RBI to improve liquidity constraints, since overnight cash rates have remained higher than the policy rate.
On Wednesday, the call rate was 6.85 percent, while the TREPS rate was 6.78 percent, both much higher than the repo rate of 6.50 percent.
So far, the central bank has used shorter-term repo auctions to inject cash into the banking system while refraining from injecting longer-term money.
“We think the RBI will keep liquidity in deficit mode in the near term, but will gradually reduce the size of the deficit going forward,” said Parul Mittal Sinha, head of financial markets, India at Standard Chartered Bank.
“We believe that easing liquidity conditions towards neutral would be interpreted as a precursor to rate cuts,” Sinha told.
Earlier this month, RBI Governor Shaktikanta Das said it would be too premature to talk of a monetary policy pivot when inflation is still elevated.
Traders expect another short-term repo auction to be announced shortly, as Rs 3 trillion in outstanding repos will mature on Thursday.
“The RBI will need to continue using VRRs to ensure liquidity demands are satisfied… We expect overnight rates to climb near repo by the end of March or early April, as government spending tends to increase up before the fiscal year ends,” said Gaura Sen Gupta, an economist at IDFC First Bank.
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Source: BS
