Banking system liquidity has reached a four-year high as FCNR(B) inflows entered the market. This excess liquidity has pushed the weighted average call rate significantly below the repo rate. Much of this money is being parked in the RBI's variable rate reverse repo operations. Treasury heads are showing a preference for shorter tenures in these operations. Experts expect liquidity to normalize to a lower level by December.
ReutersBanking system liquidity has reached a four-year high as FCNR(B) inflows entered the market
Mumbai: Banking system liquidity rose to a more than four-year high as inflows under the FCNR(B) scheme started reflecting in the system. Liquidity stood at ₹6.65 lakh crore as of August 31, the final day of the scheme, marking its highest level since May 2022. The surge in excess liquidity has also pushed the weighted average call rate significantly below the repo rate, to 4.98%.
Much of it is sitting on the sidelines or being parked in the RBI's variable rate reverse repo (VRRR) operations, which are ultra-short-term instruments. Even here, treasury heads are being selective about what tenure they deploy their funds at.
"The preference is to park funds for a tenure of 1-3 days at 5.24% in VRRR, rather than a seven day or 15 day operation. The liquidity is also not very homogeneously spread across the system because only a few big banks are getting the benefit of the FCNR(B) deposit," said Gopal Tripathi, head of treasury, Jana Small Finance Bank.
Rate Impact Surplus pushes average call rates much below repo rate
On Tuesday RBI conducted a 7-day VRRR for ₹6 lakh crore, which got bids for ₹1.14 lakh crore. The overnight operation of ₹4 lakh crore on Tuesday got bids of ₹2.6 lakh crore.
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On August 31, a 15-day VRRR of ₹6 lakh crore attracted bids of ₹1.34 lakh crore. The RBI will conduct an overnight VRRR ₹5 lakh crore on Wednesday.
"Most of the liquidity is being parked in VRRRs and in the RBIs standing deposit facility (SDF)," said AN Vinod, head treasury, South Indian Bank.
The daily average system liquidity stood at ₹3.67 lakh crore in August, versus ₹1.07 lakh crore. Consequently, the weighted average call rate (WACR) for August stood at 5.10%, while for July the WACR was at 5.23%. The RBI prefers the WACR to be closely aligned with the repo rate.
"This surplus liquidity will take some time to get absorbed into the credit market, but I expect the liquidity to normalise to ₹1-1.5 lakh crore by December," said Alok Singh, head of treasury, CSB Bank.
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