The weighted average call rate, an operating target for the rate-setting panel at Reserve Bank of India (RBI), declined 13 basis points below the current repurchase rate of 6.50% on Thursday. This call rate represents overnight borrowing costs for banks. One basis point is 0.01 percentage point.
“This (the surplus liquidity) is pretty much government spending; we presume that tax collections have been fairly high and it’s also likely that they’ve (the government) drawn WMA,” said Saugata Bhattacharya, chief economist, Axis Bank. “In addition, it is likely there have been some foreign exchange inflows and RBI would likely have mopped up some of these dollars. That has also contributed to the liquidity.”
WMA, or ways and means advances, is an RBI overdraft facility that allows the Centre to avoid cash-flow mismatches while committing funds to capital projects.
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RBI data show that so far in April, the central bank has absorbed a daily average of Rs 2.05 lakh crore from banks – and Rs 2.71 lakh crore on April 5. The last time banks had parked a larger amount with RBI was on July 6, 2022.It was also in that month that RBI received funds comparable with the Rs 2-lakh-crore daily average so far in April, the data show.NSDL data showed that foreign portfolio investors have acquired $1.1 billion worth of Indian equities so far in April, the largest monthly purchase so far in 2023. The rupee, too, has appreciated 1% so far this calendar year.
Intraday, the call money rate dropped as much as 190 basis points below the repo rate, reflecting the extent of excess liquidity.
At RBI’s policy statement on April 6, deputy governor Michael Patra flagged the enormity of likely government’s spending at the beginning of the year.
Typically, around 60% of government expenditure occurs in the first six months of a financial year. The Centre has earmarked Rs 10 lakh crore in the current fiscal for capex. Last fiscal, the government adopted a slower approach to capex spending until clarity emerged on its revenue streams, analysts said.
According to analysts, it was likely that amid its large spending push, the government was currently availing of the WMA.
Incidentally, surplus liquidity in the banking system comes amid ongoing redemptions of long-term repo operations conducted by RBI in 2020 to provide sufficient funds through the initial stages of the Covid-19 pandemic.
RBI data show that banks are scheduled to return a total of Rs 61,113 crore worth of funds to the central bank this month as the repos mature. Of this, Rs 33,935 crore worth of redemptions have already occurred.
Caution Ahead
Going ahead, however, liquidity conditions are set to tighten, in line with RBI’s stance of withdrawing monetary accommodation. Stripping away unpredictable foreign exchange flows, the principal catalyst for tighter liquidity would be increases in currency in circulation (CIC) in the economy, analysts said. Rising CIC results in funds leaving the banking system.
