In May, the Reserve Bank of India (RBI) conducted nine Variable Rate Repo (VRR) auctions, infusing a total liquidity of Rs 7.75 trillion into the banking system. Despite this, cash-starved banks placed bids worth Rs 11.4 trillion, nearly 47% higher than the notified amount by the central bank. The high demand for cash from lenders reflects the increasing liquidity tightness observed during the month.
The RBI conducted a VRR auction of Rs 1.25 trillion on Friday alone, with banks borrowing at a weighted average rate of 6.56%. Soumyajit Niyogi, Director of Core Analytical Group at India Ratings & Research, anticipates that the liquidity situation will improve significantly next month. This expectation is based on the Rs 2.1 trillion dividend transfer from the RBI to the government and the cancellation of weekly treasury bill auctions worth Rs 60,000 crore.
The heightened liquidity deficit, which rose to Rs 2.37 trillion on May 22, has put pressure on the banking system, causing the average system liquidity to slip into deficit for the first 15 days of May. However, bankers anticipate that the cash squeeze will ease once the new government takes charge and increases its spending.
With expectations of the government increasing the pace of buyback of government securities to infuse more liquidity, bankers foresee a positive shift in liquidity dynamics. Repo auctions conducted by the RBI serve as a mechanism to inject liquidity into the system, providing banks with overnight liquidity through the marginal standing facility during periods of interbank liquidity dry-up.
