The liquid surplus of the banking sector decreased to 542 billion rupees on Wednesday. This occurred due to the outflow of tax receipts, including payments for Goods and Services Tax (GST), as well as tighter money supply requirements amid banks maintaining elevated reserves in the form of the Cash Reserve Ratio (CRR).
As a result, the Weighted Average Call Rate (WACR) rose to 5.69 percent. This rate approached the Reserve Bank of India's (RBI) Marginal Standing Facility (MSF) rate of 5.75 percent, up from 5.65 percent on Tuesday.
Market participants believe the system might temporarily enter a liquidity deficit before government spending begins in early November. However, since the primary liquid surplus continues to decline, the banking system could remain in a sustained deficit from mid-November.
Total liquidity, which includes the banking system's liquidity and the government's fiscal surplus, fell from 14.2 trillion rupees on September 4th to 9.4 trillion rupees on October 9th. Market players forecast a further decline to approximately 4.9 trillion rupees by the end of December and approaching 1 trillion rupees by March.
The government's fiscal surplus on October 9th was 5.9 trillion rupees and is estimated to have grown to 6.9 trillion rupees after GST collections. This balance may shrink to around 2 trillion rupees by March, partially depending on short-term government borrowing through treasury bills.
Gaurav Sen Gupta, Chief Economist at IDFC FIRST Bank, noted that a sustained systemic liquidity deficit could easily arise by mid-November, and the overall trend indicates tightening liquidity in the coming months.
On Wednesday, the central bank rejected all applications at the government treasury bond auction, signaling concern over a sharp rise in the cost of short-term borrowing. The government planned to raise 230,000 crore rupees by selling 91, 182, and 364-day treasury bills. Traders speculated that investor demand might have exceeded RBI expectations.
It is likely that the RBI will continue conducting Variable Rate Repo (VRR) auctions to keep overnight rates within the policy corridor, especially as the WACR approaches the MSF rate. A market participant stated that the central bank will need to inject liquidity through VRR auctions to prevent overnight rates from consistently exceeding the upper limit of the liquidity corridor.
A government bank financial dealer added that 'VRR auctions will be required to keep overnight rates below MSF, at least if not close to the repo rate.' He also noted that good demand is expected given that the RBI is providing funds at a rate of 5.54 percent, while overnight rates are at 5.70 percent.
The central bank received applications totaling 1.62 trillion rupees at its VRR overnight auction on Thursday against the announced amount of 50,000 crore rupees.