Central spending gives a boost to liquidity, brings overnight rate 10 bps below repo
government spending after the polls has injected fresh liquidity into the banking system, bringing down overnight borrowing rates, Treasury Bill yields and, in turn, short-term financing costs for Indian companies, even as the central bank seems to be in no great hurry to lower policy rates.
After being at or above the Reserve Bank of India’s repo rate of 6.50% in May and June, the overnight weighted average call rate (WACR) has averaged 6.39% so far in July, more than 10 basis points lower than the benchmark policy rate, an analysis of daily central bank data showed. One basis point is a hundredth of a percentage point.
The key driver of the evident shift in banking system liquidity to a surplus from a protracted deficit has been a flow of government expenditure — of about Rs 1 lakh crore — over the past few days. “Government cash surplus (Centre and states), which had peaked at Rs 5.1 lakh crore as of May 24 after the RBI dividend, has reduced to Rs 2.1 lakh crore as of July 11, with a pick-up in the pace of government expenditure,” said Gaura Sengupta, chief economist, IDFC First Bank.
On June 28, the government cash surplus was at Rs 3.2 lakh crore, indicating the Centre has spent Rs 1.1 lakh crore in two weeks. Government expenditure flows through banking system.
In July so far, banking system surplus liquidity, as measured by absorption of funds by the RBI, has averaged Rs 1.1 lakh crore, bringing down the WACR, RBI data showed.
RBI’s approach to liquidity:
In May and June, banking system liquidity was
