Banks Park Rs 1.67 Lakh Crore In Excess Cash With The RBI
Banks, flush with deposits following the government’s decision to withdraw notes of Rs 500 and Rs 1000, are rushing to park their surplus funds with the Reserve Bank of India.
On Tuesday, the banking sector parked a total of Rs 1.67 lakh crore with the central bank through two variable rate term reverse repo auctions.
Reverse repo operations are part of the RBI’s liquidity adjustment facility. The window is used to remove excess cash from the system in contrast to the repo window which is used to infuse cash.
Banks offered Rs 75,713 crore through the 14-day reverse repo auction and Rs 49,825 crore for the 28-day reverse repo auction, according to a press release on the RBI’s website. A total of Rs 99,834 crore was accepted at a weighted average rate of 6.16 percent by the RBI out of the notified amount of Rs 1 lakh crore.
At the second auction, the RBI accepted bids worth Rs 20,002 crore at the overnight window at a weighted average rate of 6.19 percent, and Rs 47,053 crore at the 14-day window at 6.21 percent.
The sharp jump in liquidity was anticipated. At State Bank of India’s earnings conference last week, chairman, Arundhati Bhattacharya revised the bank’s deposit growth target for the financial year to 15.0-15.5 percent from 13.5 percent earlier.
“As a result of the government announcing that it would demonetise high-denomination notes, we expect banking system liquidity to improve in the coming weeks,” said Nomura Global Markets Research in a note on Tuesday.
As of Monday, banks had collected a total of over Rs 3 lakh crore, according to a government official. According to the RBI’s annual report, the total currency in value terms that were denominated in Rs 500 and Rs 1,000 notes was Rs 14.1 lakh crore.
Not all that is coming in through demonetisation will remain, but it’s clear that part of it could stay. Also, curbs on withdrawals could remain till end December... The deposits that have come in have had an effect. A banking system that was in a deficit of Rs 40,000 crore on Friday has now moved to surplus.Harihar Krishnamoorthy, Head Fixed Income Currency & Commodities, FirstRand Bank India
Of the surplus, banks would have set aside a certain amount for their cash reserve ratio requirements and also for the redemption of FCNR deposits which are maturing in November, said Krishnamoorthy. Before the demonetisation drive was announced, the market was expecting the RBI to come in and buy bonds worth Rs 50,000 crore to Rs 1 lakh crore through open market operations to increase liquidity, but that has now changed.
Nomura Global Markets Research expects that the initial increase in the liquidity will be so high that the RBI will have to resort to measures beyond its usual term reverse repos.
In fact, we do not rule out open market operations (OMO) sales, possibly in short-term bonds. That said, we expect the positive liquidity impact on bond markets to outweigh the impact from any OMO sales.Nomura Global Markets Research
Krishnamoorthy said that while an open market operation, wherein the RBI could offer bonds to banks to suck out systemic liquidity, is an option, it may not be chosen by the RBI.
“The sense is that the RBI will keep conducting reverse repo auctions to manage liquidity till mid-December, by which time the system will probably settle in a surplus,” he said.