The banking system neared Rs 1.47 trillion of liquidity deficit on Monday, the highest since January 29, 2020, when the banking system liquidity deficit went up to Rs 3 trillion.
The Reserve Bank of India (RBI) injected Rs 1.47 trillion on Monday and Rs 1.46 trillion on Tuesday.
Market participants say that the disbursement of Rs 25,000 crore as the second tranche of incremental cash reserve ratio (I-CRR) will not be enough, and the liquidity might tighten further to Rs 2 trillion in short term due to tax outflows and arrival of the festival season.
“For now it looks like going into the festival season there would be more outflow and cash leakage from the system. It will lead to higher deficit for the banking system,” said Naveen Singh, head of trading and EVP at ICICI Securities Primary Dealership.
“There are other factors at play. We are not seeing much dollar flows coming into the system and the RBI has been continuously defending from the other side.
"We are not seeing any inflow from the Fx (foreign exchange) side, and the RBI is not in the mood to add durable liquidity in the system.
"Gradually, the liquidity deficit might go up to Rs 3 trillion, but not in the immediate future,” Singh said.
The banking liquidity is expected to remain under pressure at least until the end of September.
Market participants see the liquidity condition improving by the start of October.
The RBI had decided on September 8 to discontinue the I-CRR by October 7 in a phased manner.
Out of the total I-CRR maintained, 25 per cent will be disbursed on September 19, another 25 per cent on September 23, and the remaining 50 per cent will be released on October 7.
“We are towards the end of September now, and there are advance tax flows that are causing a pressure on the liquidity.
"Added to that, the rupee has depreciated above 83 and RBI intervention has happened, so that has also sucked up some rupee liquidity from the system.
"I think till the end of this month, the liquidity will remain under pressure.
"Only by the beginning of October can we start seeing liquidity moving towards surplus,” said Sakshi Gupta, principal economist at HDFC Bank.
Consequently, the weighted average call rate surged up to 6.82 per cent, and tri-party repo rate (TREPS) rose above the marginal standing facility rate at 6.76 per cent.
“The overnight money rates have topped out at current levels.
"They should remain in a narrow range and should move between 4-5 basis points,” a money market dealer at a state-owned bank said.
“The rates will surely remain high for longer but will not rise significantly from current levels,” he added.
The weighted average call rate and TREPS rate settled at 6.76 per cent on Wednesday.