By Dharamraj Dhutia
MUMBAI, Feb 10 (Reuters) - The Reserve Bank of India's
move to inject longer-term liquidity through a tool it had left
untouched for three years is likely to be used more often as the
banking system is poised to move from surplus towards a more
consistent deficit, analysts said.
The central bank will conduct a 14-day variable rate repo
auction later on Friday–its first since February 2020–to infuse
500 billion rupees ($6.06 billion) into the banking system.
The daily average surplus of 180 billion rupees in the last
three weeks is sharply lower than the 860 billion rupees in the
first three weeks of 2022.
More recently, liquidity has been oscillating between a
surplus (of over 650 billion rupees on Monday) and a marginal
deficit (of 112 billion rupees on Wednesday) amid a strong
pick-up in bank credit and higher government spending.
"Gradually, the liquidity deficit is likely to widen," said
Deepak Agrawal, chief investment officer - debt at Kotak
Mahindra Mutual Fund.
"An increase in currency in circulation and a build-up of
government cash balances with the central bank towards the
fiscal year-end will be factors that add to the deficit over the
next few weeks," he said.
The tightening liquidity boosted the overnight inter-bank
call money rates to as high as 6.80% on Thursday, to above the
marginal standing facility rate of 6.75%.
The RBI's objective is to maintain the overnight inter-bank
rate close to the policy rate–currently at 6.50%–and prevent it
from overshooting the MSF rate, which acts as the upper end of
the interest rate corridor.
"The 14-day variable rate repo announced by the RBI shows
that we could see a longer period of liquidity deficit in the
coming months," said Guara Sen Gupta, India economist at IDFC
First Bank.
The liquidity may tighten further as outflows worth nearly
750 billion rupees are due over the next couple of months for
maturing long-term repos conducted at the start of the pandemic.
"...the activation of the 14-day variable rate repo auction
appears to be the right strategy to prepare market participants
for the incoming gradual squeeze on liquidity surplus," said
Vivek Kumar, an economist at QuantEco Research.
OVERNIGHT LIQUIDITY
Market participants also cautioned that the 14-day repo
conducted in isolation could lead to volatility in the
short-term call and TREPS market.
"Unless the central bank supplements the 14-day auction with
a shorter-term overnight repo, we may see some volatility
continuing in overnight rates, if all banks are not willing to
borrow for 14 days," Kotak Mahindra Mutual Fund's Agarwal said.
Moreover, traders say some banks may not unwilling to borrow
for longer durations at an elevated rate and may still prefer
overnight money.
"The 14-day repo could be supplemented by short-dated VRR
auctions on a need basis to tide over liquidity demand caused by
short-term frictional factors," QuantEco Research's Kumar said.
($1 = 82.6220 Indian rupees)
(Reporting by Dharamraj Dhutia; Editing by Savio D'Souza)
