Treasuries thresholds jump as banking system liquidity tightens

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Band Swati Bhat

MUMBAI, July 27 (Reuters)The Reserve Bank of India on Wednesday sold 3-month treasury bills at 5.62%, well above the 5.40% threshold set at last week’s auction, the system’s liquidity crunch. bank that caused a spike in short-term rates.

Interbank overnight money rate in India INROUND= also rose to 5.3%, above the repo rate of 4.9%.

“This is an indication that an era of excess liquidity in the banking system is coming to an end,” said Abhishek Goenka, Founder and CEO of IFA Global.

“The recent liquidity crunch is due to outflows related to the Goods and Services Tax. The amount placed by banks in the standing overnight deposit facility with the central bank has been steadily declining,” said- he added.

Traders said that apart from early tax outflows, the RBI’s dollar selling intervention in the foreign exchange market to prevent further rupee weakness, has also taken rupee liquidity out of the banking system these last weeks.

They said, however, that with the 14-day floating rate reverse repo maturing on July 29 and the maturing of some central bank futures positions, some of the liquidity crunch should start to ease. mitigate.

Government spending towards the end of the month should also help push down interbank overnight money rates, they added.

The liquidity of the banking system has tightened over time due to the cash reserve ratio, dollar/rupee buy-sell swaps, outflows of foreign funds, increased currency in circulation and balances of high government cash at the central bank.

With the RBI policy review next week, traders will be watching liquidity comments closely, as the central bank said earlier that it was looking to reduce excess liquidity in the system on a multi-year approach.

“We could start to see volatility in overnight rates and imbalances in the liquidity position of banks if excess liquidity continues to dry up. Prepare for more volatility in overnight rates the day,” Goenka said.

(Reporting by Swati Bhat; Editing by Angus MacSwan)

(([email protected]; twitter.com/swatibhat22; +91-22-68414381; Reuters Messaging: [email protected]))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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