The Reserve Bank of India (RBI) will hold an overnight variable rate repo auction for Rs 50,000 crore on Thursday as a result of the banking system’s liquidity slipping into a shortfall.

Over the past week or two, banks have been borrowing larger sums via the marginal standing facility (MSF) window; on Tuesday, they drew just over Rs 30,000 crore, up from Rs 11,000 crore on Monday. Additionally, the call money rate has gradually surpassed the repo rate over the last few sessions; it was 5.6% on Monday and 5.64% on Tuesday.

According to cash reserve ratio (CRR) adjustments, the net infusion of funds was around Rs 21,873 crore, while the deficit came to almost Rs 39,000 crore, according to Vivek Kumar, economist at Quantico Research.

The system was somewhere between a deficit and a small surplus, according to HDFC Bank Executive Vice President (Overseas Treasury) Bhaskar Panda. He said that the RBI’s intervention in the currency markets, the withdrawal due to advance taxes, the increase in credit demand, and the slower rate of deposit growth had all contributed to the reduction in liquidity. “As the holiday season approaches, there will be a demand for funding. The RBI will probably take some action to make sure there is enough liquidity, according to Panda.

The Bank of Baroda’s Sushanta Mohanty, General Manager of Treasury, thinks the tightening of liquidity is only temporary. “The RBI is keeping an eye on the situation and will inject liquidity if needed using various mechanisms, such as variable repo. According to Mohanty, some of the liquidity that has been lost as a result of advance taxes and the goods and services tax will gradually return.

Importantly, tax revenues have been strong, and the government’s cash balances with the RBI remain high at an estimated Rs 3.2 trillion. Over the upcoming weeks, some of this is anticipated to flow back into the system.

Future demand for finances will increase when the holiday season gets underway. The RBI will probably take some action to make sure there is enough liquidity, according to Panda. According to Kotak Mahindra Bank Chief Economist Upasna Bhardwaj, holiday spending will limit liquidity as we move into October. We anticipate that overnight rates will remain above the repo rate and that there would be more frequent variable repo rate auctions unless the size of government spending is very big, according to Bhardwaj.

Since the RBI has changed its accommodative posture, Mohanty noted that liquidity is likely to remain at neutral levels till inflation is brought under control. The RBI is keeping an eye on the situation and will inject liquidity as needed using a variety of mechanisms, such as variable repo.

According to Kumar of Quantico, the RBI’s operations in the foreign exchange market have also reduced liquidity. The money has been permanently detained, according to our estimate of the RBI’s injection between April and the present. The Indian rupee hit a new low on Wednesday, closing at 79.98 to the dollar.

Simpi Kumari did B.A. in Journalism and Mass Communication from LNMU Bihar and Masters from Chandigarh University. She is a passionate blogger, who understands the power of words and has a keen interest in writing articles and news story. Simpi is currently working as an intern at TheShiningMedia.in. Simpi’s strength are self motivated hard work and a disciplined person. She is reachable on [email protected]

By Simpi Kumari

Simpi Kumari did B.A. in Journalism and Mass Communication from LNMU Bihar and Masters from Chandigarh University. She is a passionate blogger, who understands the power of words and has a keen interest in writing articles and news story. Simpi is currently working as an intern at TheShiningMedia.in. Simpi's strength are self motivated hard work and a disciplined person. She is reachable on [email protected]

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