After being in surplus for three consecutive weeks, the banking system’s liquidity could come under pressure this week due to higher borrowing needs of both corporates and the government (centre and state borrowings aggregating Rs 30,000 crore), says Care Ratings.
However, the agency added that the return of currency in circulation in the banking system and higher FPI flows could ease the liquidity scenario in the banking system.
Despite surplus liquidity, the week gone by saw significant moderation over the previous week. For instance, the estimated average net outstanding liquidity surplus for the week ended June 21 based on the net outstanding repo transactions -- difference between the total outstanding reverse repo and outstanding repo operation including marginal standing facility and standing liquidity facility -- stood at Rs 8,808 crore compared with liquidity surplus of Rs 42,830 crore during the previous week.
According to Care, during the week, the daily net liquidity outstanding was in surplus throughout the week barring June 20 when net liquidity outstanding was in deficit at Rs 3,094 crore.
“The moderation in the liquidity surplus during the week can be attributed to the lower government spending, elevated currency in circulation and scheduled fortnightly reporting of banks with RBI,” it noted. Government’s cash balance with RBI ended the week at Rs 38,458 crore against nil week ago.
Meanwhile, currency in circulation stood at Rs 22 lakh crore as on June 14, which further strained system liquidity, but the situation eased due to higher FPI flows, which in turn would translate into higher deposits, and durable liquidity infusion by RBI through purchases via open market operations aggregating Rs 12,500 crore partially eased liquidity.
The daily net liquidity infusion and absorption by the RBI into the banking system (ie., daily repo and reverse repo operations including fresh term repo and reverse repo auctions, excluding outstanding term repo and reverse repo operations), showed that the system had a liquidity surplus last week. The RBI, on an average, absorbed Rs 41,425 crore during the week as against Rs 41,508 crore a week ago.
RBI Liquidity Operations
The RBI undertook its fourth Open Market Operation (OMO) purchase for the financial year FY20 on June 20, infusing durable liquidity worth H12,500 crore. The total infusion by RBI via OMO purchase during June (up to 21 June) has been H27,500 crore, higher than H25,000 crore infusion in May 2019.
Apart from OMO purchases, the central bank has also been undertaking repo transactions (including term repos) aggregating G65,223 crore during week spanning June 17-21. So far in FY20, the RBI has undertaken OMO purchase of G52,525 crore, of which G25 crore was not via auction.
During the last financial year (FY19), RBI has infused durable liquidity to the tune of H2.99 lakh crore by way of OMO purchases, of which H772 crore were not infused via auctions. The RBI had also undertaken unannounced OMO sales of H50 crore during February and March 2019