Banking System Liquidity Tightens Ahead of Tax Payments

December 13, 2024

Liquidity in the banking system is tightening as mid-month payments for GST and advance taxes approach, which has led to increased demand for funds at the Reserve Bank of India’s (RBI) variable rate repo (VRR) auction. The recent VRR auction saw banks submitting bids exceeding the RBI’s offered amount.

VRR Auction

In a two-day VRR auction, banks submitted bids totaling ₹62,877 crore. The RBI had only announced ₹25,000 crore for the auction. Ultimately, the RBI accepted bids worth ₹25,005 crore at an average rate of 6.65%. This reflects heightened liquidity needs among banks.

Previous Auction Data

On December 9, an overnight VRR auction recorded bids of ₹40,630 crore, matching the RBI’s notified amount. The average rate for this auction was 6.53%. These figures indicate a consistent demand for liquidity support from the banking sector.

RBI’s Policy Adjustments

Former RBI Governor Shaktikanta Das brought into light that while current liquidity is sufficient, it may tighten due to tax payments, increased currency circulation, and volatile capital flows. In response, the RBI announced a reduction in the cash reserve ratio (CRR) for banks to 4% of net demand and time liabilities (NDTL). This adjustment will occur in two phases of 25 basis points each, starting on December 14 and December 28, 2024.

Expected Impact of CRR Reduction

The CRR reduction will restore the ratio to its pre-April 2022 level, releasing ₹1.16 lakh crore into the banking system. This move aligns with the RBI’s neutral policy stance and aims to alleviate liquidity pressures.

The RBI will actively manage liquidity to maintain stable interest rates and support the economy’s needs. Continuous monitoring and adjustments are essential to address the evolving liquidity landscape in the banking sector.

GKToday Facts for Exams:
VRR (Variable Rate Repo): VRR is a monetary policy tool used by the RBI. It allows banks to borrow funds at a variable interest rate, responding to liquidity needs.
CRR (Cash Reserve Ratio): CRR is the percentage of a bank’s total deposits that must be held in reserve with the RBI. Changes in CRR affect liquidity and credit availability in the economy.
NDTL (Net Demand and Time Liabilities): NDTL refers to the total liabilities of banks, including demand deposits and time deposits. It is crucial for calculating CRR and liquidity management.

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