Treasury bill cut-offs jump as banking system liquidity tightens

THE Reserve Bank of India (RBI) sold 3-month treasury bills at 5.62 per cent on Wednesday (Jul 27), sharply above the 5.40 per cent cut-off set at the auction last week as tightness in banking system liquidity caused a spike in short-term rates.

India's inter-bank call money rate too has risen to 5.3 per cent, above the repo rate of 4.9 per cent.

"This is an indication that an era of banking system liquidity surplus is coming to an end," said Abhishek Goenka, founder and CEO of IFA Global.

"Recent liquidity tightness has been on account of goods and services tax related outflows. The quantum being placed by banks in overnight standing deposit facility with central bank has been steadily declining," he added.

Traders said apart from the advance tax outflows, the RBI's US dollar selling intervention in the foreign exchange market to prevent further weakness in the rupee, has also been pulling out rupee liquidity from the banking system in recent weeks.

They said however that with the 14-day variable rate reverse repo maturing on July 29 and maturity of some forward positions of the central bank, some part of the liquidity tightness should start to ease off.

Government spending around month-end is also expected to aid bring down inter-bank call money rates, they added.

Banking system liquidity has tightened overtime on account of the cash reserve ratio, US dollar/rupee buy-sell swaps, foreign fund outflows, increase in currency in circulation and high government cash balances with the central bank.

With the RBI policy review next week, traders will closely monitor the commetary around liquidity with the central bank earlier saying it was looking to bring down liquidity surplus in the system over a multi-year approach.

"We may start seeing volatility in overnight rates and imbalances in Liquidity position among banks if the surplus liquidity keeps draining out further. Brace for more volatility in overnight rates," Goenka said. REUTERS