The banking system liquidity slipped into deficit in December for the first time since June 2024 even as both tranches of the easing of cash reserve ratio (CRR) came into effect, infusing ₹1.16 lakh crore.
Despite the deficit, the Reserve Bank of India has managed to keep overnight borrowing costs close to the policy repo rate by finetuning variable rate repo (VRR) auctions. The average call rate for December stood at 6.55%, five basis points above the repo rate. One basis point is 0.01 percentage point.
However, managing call rates through VRR auctions is a temporary option and the RBI will have to decide on how much it would want the rupee to depreciate, as intervention in the foreign exchange market is one of the biggest reasons for pressure on liquidity, economists said.
System liquidity has continuously been in deficit since December 16, with an average deficit of ₹68,469 crore, RBI data showed. Easing of CRR to 4% from 4.5% helped take some pressure off system liquidity, keeping overnight borrowing costs down, economists said.
“Going ahead, government spending should be higher during Q4. The CRR reduction will also help the banking system liquidity. However, trends in USD-INR and the possibility of RBI’s intervention in the foreign exchange market hold the key for system liquidity in the coming weeks/months. In any case, the RBI has a variety of tools to manage the liquidity situation and they will continue to use them judiciously whenever needed,” Siddhartha Sanyal, chief economist at Bandhan Bank told ET.
The rupee has been on a weakening trajectory for the past few months, reaching record lows multiple times. The local unit closed at a record low for the eighth consecutive session on Thursday at 85.75 to the dollar versus 85.64 the previous day, LESG data showed. India’s foreign exchange reserves have depleted by $60 billion since late September, showing the extent of intervention in the foreign exchange market.
“The call rate is managed because of the aggressive pace of VRRs by the RBI, if this tool were not to be there, the call rate would be much higher,” said Gaura Sengupta, chief economist at IDFC First Bank.
The RBI conducted 14 VRR auctions in December to support deficit liquidity, infusing gross ₹10 lakh crore for different tenures, and did not conduct any variable rate reverse repo (VRRR) auctions even in the first half of the month when the liquidity was in surplus. Quarterly advance tax outflows added woes to strained system liquidity in mid-December.
