The Reserve Bank of India (RBI) received bids worth Rs 3 trillion against the notified amount of Rs 1.25 trillion from cash-starved banks at the seven-day variable rate repo (VRR) auction on Friday, reflecting the extent of cash squeeze in the banking system.
The liquidity deficit in the banking system widened to 8-year high of Rs 2.68 trillion on Thursday, pushing up the call rate to 7%, which is its highest level since March this year.
“This situation will prevail for another week,” he added.
He said that liquidity situation will now depend on government spending which is likely to start from next month.Some banks have raised deposit rates selectively to garner funds which will help at micro level, he added.
The VRR held on Thursday was fourth such repo infusion in two weeks, as banking system liquidity continues to stay in deficit, with liquidity touching levels last seen eight years ago.
The RBI also conducted a 2-day VRR auction of Rs 50,000 crore on Wednesday in which banks placed bids worth Rs 1.58 trillion, but the central bank accepted only Rs 50,007 crore.
Similarly, last week’s 7-day VRR auction got a heavy response from the banks, where they submitted bids worth Rs 4.25 trillion against the notified amount of Rs 1.75 trillion.
The banking system liquidity shortfall has constantly stayed above Rs 2 trillion since the last few days, while the daily average banking system liquidity deficit in December rose to Rs 1.01 trillion.
Despite the repo infusion last week, the weighted average interbank call money rate has stayed above the Marginal Standing Facility rate of 6.75% in the last few days.
“We expect the tight liquidity conditions to improve in the next month on account of government spending which will also bring call rates lower,” said head of treasury operations at a private bank.
The liquidity squeeze has prompted the central bank skip the 14-day variable rate reverse repo for the second consecutive time. The central bank conducts a repo auction to inject liquidity into the banking system while reverse repo auction is conducted to mop up excess liquidity.