Mumbai, March 22, 2024: The Reserve Bank of India (RBI) took decisive action on Friday to address the liquidity tightness in the banking system. As the liquidity deficit widened to Rs 1.38 trillion on Thursday, the central bank conducted three variable rate repo (VRR) auctions to infuse much-needed liquidity.
Liquidity Challenges and Rising Money Market Rates
- Liquidity Deficit:
- The liquidity deficit within the system has been a growing concern.
- Latest data revealed that the banking system’s liquidity deficit reached Rs 1.38 trillion.
- Weighted Average Money Market Rates:
- The weighted average money market rate surged above the Marginal Standing Facility (MSF) rate.
- On Friday, the weighted average money market rate closed at 6.77%, compared to 6.73% on Thursday.
- The current MSF rate stands at 6.75%.
- Persisting Liquidity Challenges:
- Market participants anticipate that the liquidity deficit will persist.
- The government’s borrowing program for the next financial year, starting in April, adds to the caution.
- Banks are wary of releasing funds, especially given the end of the financial year.
Details of the VRR Auctions
- First 14-Day VRR Auction:
- Banks submitted bids aggregating Rs 1.05 trillion against the notified amount of Rs 25,000 crore.
- The central bank allotted funds totaling Rs 25,004 crore at a weighted average rate of 6.73%.
- Second Four-Day VRR Auction:
- Banks placed bids totaling Rs 1.32 trillion against the notified amount of Rs 50,000 crore.
- The central bank allotted funds amounting to Rs 50,005 crore at a weighted average rate of 6.74%.
- Third Four-Day VRR Auction:
- Banks submitted bids aggregating Rs 40,700 crore against the notified amount of Rs 50,000 crore.
- The central bank allotted funds totaling Rs 40,700 crore at a weighted average rate of 6.73%.
Outlook and Implications
- The government’s spending may provide some relief, but banks remain cautious.
- With auctions of around Rs 1.5 trillion scheduled for the last week of March, the funds are expected to be absorbed by the government itself.
The RBI’s proactive measures aim to stabilize liquidity conditions and ensure the smooth functioning of the financial system. As the new fiscal year approaches, market participants will closely monitor developments and the central bank’s response.
Disclaimer: This article provides an overview of recent events and does not constitute financial advice. Readers are encouraged to consult with financial professionals for personalized guidance.