The WACR rose to 6.70% on Tuesday as against 6.67% on Monday, money market traders said.
One basis point is a hundredth of a percentage point.
Reserve Bank of India (RBI) data showed liquidity in the banking system was at a large deficit of ₹1.1 lakh crore on December 16 due to quarterly advance tax outflows. Liquidity in the system was also drained on RBI interventions in the foreign exchange market, as it was seen selling dollars to stem a sharp fall in the rupee.
In anticipation of tightening liquidity conditions, RBI announced a 50 basis point cut in cash reserve ratio and the first tranche of 25 bps cut has infused ₹58,000 crore from December 14.
“The CRR cut did not have a large impact because they broke it up into two parts, which reduces its impact in terms of liquidity infusion,” said Gaura Sen Gupta, chief economist, IDFC First Bank. “A key factor of the tight liquidity conditions is RBI’s foreign exchange intervention, with the RBI net selling dollars since October. Balance of payments (BoP) for the third quarter is deep in the negative.”
Gap Unlikely to Narrow
System liquidity is expected to remain in deficit for the next few days on GST outflows on December 20 and the government’s back-loaded expenditure toward the end of the month, economists said.
In the first half of December, the average system liquidity was in a surplus of ₹43,317 crore, sharply lower than an average surplus of ₹1.38 lakh crore in November and ₹1.50 lakh crore in October. In anticipation of tight liquidity, the RBI had conducted variable rate repo auctions (VRR) of ₹3.25 lakh crore to infuse liquidity this month, while it did not conduct any auctions to absorb liquidity. Typically, the RBI does two-way operations to align the call rate near the policy repo rate.
Foreign exchange interventions have drained core liquidity. As of December 6, core liquidity is ₹50,000 crore as against ₹4.6 lakh crore in September. The RBI’s foreign exchange reserves also fell by $50 billion, after touching a peak of $704 billion in September.
“The RBI must supply dollars in the market to prevent excess volatility in the currency, which is draining INR liquidity. At this moment, they (RBI) will have to choose the pace of currency depreciation, keeping in mind the drain on foreign exchange reserves and INR liquidity in the banking system,” Sen Gupta said.
The rupee hit a record low of 84.93/$1 during the day, before closing at 84.895 per US dollar on Tuesday, due to widening trade deficit and outflows from local equities. Interventions from the RBI helped cap excess weakness in the currency, traders said.
