Mumbai, March 5, 2018
Higher tax outgo will fuel cash demand by banks, corporate sectors
The Reserve Bank of India (RBI) will infuse up to Rs 1 trillion into the banking system through special auctions this month to manage additional demand for liquidity as activities of banks and corporate entities pick pace before the close of the financial year.
The current financial year (2017-18) ends on March 31.
Treasury executives said liquidity in the system has been under pressure, with supply falling short of demand on some days. The RBI has maintained its stance to keep liquidity close to neutral.
The announcement to conduct special auctions to inject additional resources into the system to tackle the changing situation — high activity and outgo on account of tax payments — will give respite to the market, and prevent any sharp rise in short-term interest rates.
Last month, the RBI had indicated that it was prepared to inject adequate additional liquidity, using a combination of appropriate instruments, while continuing with its normal liquidity adjustment facility (LAF) operations.
On Monday, the RBI in a statement said after reviewing the current and evolving liquidity conditions in the banking system, it had been decided to conduct “additional variable rate repo operations” for longer tenors to provide additional liquidity support to the banks in March.
It will conduct four variable-rate term repo auctions in March 2018. The amount in each auction would be Rs 250 billion. These auctions will be conducted in addition to the regular 14-day variable rate term repo auctions, the RBI added.
The outgo on account income and corporate taxes by the middle of the month will create pressures on liquidity. This is last tranche for 2017-18, and the quantum of money going into government coffers will be considerably higher than in the previous three quarters.
Karthik Srinivasan, group head, Icra, said the proposed injection of additional liquidity should help cap the short-term rates and also help in lowering rate volatilities for the rest of the month.
The additional amount infused through auction and money coming into the market on maturity of securities issued earlier would be adequate to meet demands, said Ananth Narayan, associate professor, S P Jain Institute of Management and Research.
On February 15, the RBI had said while the system liquidity was currently in surplus, it was moving steadily towards neutrality. The central bank would inject extra liquidity to address additional demand due to increase in currency in circulation, advance tax payments by corporate entities, and provide flexibility to banks in its liquidity management towards March-end.
As a special case, standalone primary dealers will be allowed to participate, along with other eligible participants in the last regular term-repo auction of the current financial year. The date for the last auction will be March 28.
[The Business Standard]