RBI Announces Rs 10000 Cr Liquidity Support Through 14-day Term Repo Auction

On account of Advance Tax payments commencing from mid-December 2013, liquidity conditions are anticipated to squeeze. The Reserve Bank of India (RBI), which is directly monitoring liquidity conditions, has decided to provide additional liquidity of Rs 10000 crore through the 14-day term repo scheduled to be conducted on December 13, 2013 so as to ensure that adequate liquidity is available in the system.

Banks’ borrowings under the liquidity adjustment facility (LAF) window on Wednesday (December 11, 2013) was to the tune of Rs 19909 crore. The borrowing has largely remained under Rs 20000 crore for about two weeks.

Banks see large withdrawals and redemptions during this period as companies need to pay Advance Taxes for the current quarter by December 15. The tax outflows are estimated to be Rs 60000-80000 crore, which would result in tightening of liquidity.

The RBI provides liquidity support through the repo tender and the Marginal Standing Facility (MSF) on a daily basis. Recently, the central bank also started providing liquidity through term repos. Borrowings from the repo tender are capped at 0.5% of bank deposits.

So far, the RBI has conducted two term repo auctions (11-days and 14-days respectively) in the last one month.

The additional support would prevent a rise in overnight rates and a further surge in daily borrowings under the MSF. The RBI would like to avoid any volatility in the overnight rate and perhaps wants the call rate to remain near the repo rate. The overnight call money rate has been hovering below the repo rate of 7.75% so far in this month.