After an awkward increase in overnight lending rates on Monday that reflected the near-total erosion of the systemic surplus—from roughly $8 lakh crore a year ago to within a touching distance of a deficit last week—central India’s bank may have to change its approach to the currency markets and liquidity management.
When a financial asset or security may be quickly and easily converted into cash without depreciating, this is referred to as having liquidity. Cash alone is the most liquid of all the assets. The term “liquidity” describes how quickly and easily a security or asset can be turned into cash without depreciating.
The most liquid asset is cash, while the least liquid asset is tangible goods. Market liquidity and accounting liquidity are the two primary types of liquidity.
The most popular methods for assessing liquidity are current, quick, and cash ratios.
Nevertheless, there is still a chance that the Reserve Bank of India (RBI) would continue to raise rates to control inflation. Analysts predict that the central bank would review its liquidity policies in light of the spike in call money rates. Its strategy can involve developing specialized repo calendars and making fewer frequent operations in the currency market.
The longer-term repo will probably be used by the RBI to address this low liquidity, according to Soumyajit Niyogi, director of India Ratings. “The central bank may provide a long-term repo calendar to allay the worries. However, these sporadic severe dips in banking system liquidity do not bode well given the increasing operational and financial constraints, particularly for companies with poorer credit profiles.”
As opposed to 5.17% last Thursday and 5.20% last Friday, the weighted average rate in the interbank call market, where banks lend and borrow from one another, stood at 5.61% on Monday.
Effect of Tax Payment on liquidity
Call money rates reached as high as 5.80% during the trading session, or 40 basis points higher than the current repo rate of 5.40%.0.01% is one basis point. The rate at which banks borrow short-term funds from the RBI is known as the repo.
Anindya Banerjee, a currency expert at Kotak Securities, predicted that the central bank’s upfront spot-market intervention to prevent a sharp decline in the value of the rupee versus the dollar would come to an end. The RBI effectively drains rupees from the banking system when it sells dollars to slow the rupee’s value depreciation, thus limiting rupee liquidity.
According to figures from the central bank, the net surplus liquidity in the banking sector fell to more than only Rs 3,200 crore last Friday. About a year ago, the excess was Rs 8.03 lakh crore. According to data from the Clearing Corporation of India, the weighted average rate (overnight) in the Tri-party Repo (TREP) market increased by nearly a third of a percentage point on Monday. The gauge ended the day at 5.62% as opposed to 5.30% last Thursday and 5.27% on Friday. Participating on this platform are banks, bond houses, corporations, insurance companies, and mutual funds.
Sushanta Mohanty, general manager of treasury at the Bank of Baroda, stated that the decline in surplus cash was probably caused by advance tax and GST payments. “The erosion of the excess liquidity, which may also slip into deficit over the following several days, is reflected in rising overnight rates. To remedy the situation, the RBI may introduce certain windows, such as the variable repo rate or fixed-repo windows.”The day’s highest overnight TREP was 5.75%.
The sum of money you owe to taxing bodies, such as your local, state, and federal governments, is known as your tax liability (e.g., the IRS). You owe your creditor money when you have a tax liability because it is a contract. Tax liabilities can arise for both people and companies. Tax money is used by the government to pay for administrative and social services. For instance, retirement and disability payments are paid for through Social Security taxes.
According to the changing liquidity and financial conditions, the RBI will execute two-way fine-tuning operations as and when justified, including variable rate repo (VRR) and variable rate reverse repo (VRRR) operations of various tenors. Shaktikanta Das, governor of the RBI, stated during the August 5 bi-monthly policy meeting.
As evidenced by the average daily absorptions under the Liquidity Adjustment Facility (both Special Deposit Facility and variable rate reverse repo auctions), the amount of excess liquidity in the banking system decreased from Rs 6.7 lakh crore during April-May to Rs 3.8 lakh crore during June and July. Read about How RBI Increases Repo Rate To 4.40% With Immediate Effect?