India’s banking system liquidity has slipped into deficit for the first time in nearly three months, primarily due to advance tax outflows and increased currency leakage, prompting the Reserve Bank of India (RBI) to step in with a sizeable liquidity infusion. The banking system recorded a liquidity deficit of Rs 19,971 crore, reversing the surplus conditions that had prevailed since March.
Key Highlights
- Banking system liquidity slipped into a Rs 19,971 crore deficit after nearly three months.
- RBI injected Rs 1.41 trillion via VRR auction to ease temporary liquidity pressures.
To address the temporary liquidity crunch, the RBI injected Rs 1.41 lakh crore through a seven-day Variable Rate Repo (VRR) auction. The funds were infused at a weighted average rate of 5.26%, helping ease short-term funding pressures in the banking system.
Advance Tax Payments Drain Banking System Liquidity
Market participants attributed the sudden liquidity tightness largely to quarter-end advance tax payments, which led to a significant rise in government cash balances and temporarily withdrew funds from the banking system. Elevated currency circulation also added to the pressure as cash withdrawals remained higher than usual.
As liquidity tightened, overnight borrowing costs moved higher. The weighted average call rate (WACR), the RBI's key operating target for monetary policy transmission, rose to around 5.38%, reflecting increased demand for short-term funds.
Also Read: Banking Liquidity Surplus Drops to FY27 Low at Rs 23,881 Crore
RBI Uses VRR Auctions to Stabilise Short-Term Rates
The RBI has been actively deploying VRR auctions over the past few days to ensure liquidity conditions remain orderly and overnight rates stay aligned with the policy repo rate. Since mid-June, the central bank has infused more than Rs 2.4 trillion through VRR operations of varying tenures to offset the impact of tax-related outflows.
VRR auctions allow banks to borrow funds from the RBI against government securities at market-determined rates and are commonly used to address temporary liquidity mismatches in the financial system.
Liquidity Conditions Expected to Improve
Economists expect the liquidity deficit to be short-lived. As government spending accelerates toward the end of the month and tax collections are redistributed into the economy, liquidity conditions are likely to improve. Additional support could also come from foreign capital inflows, including deposits mobilised under the RBI's FCNR(B) measures aimed at attracting overseas funds.
The RBI's latest State of the Economy assessment has also indicated that a drawdown in government cash balances and continued policy support should help restore surplus liquidity in the coming weeks, easing pressure on money market rates and supporting credit conditions.
