Liquidity may see surplus this week

Mumbai: Liquidity in the banking system would turn surplus in the week to June 1 owing to increased government spending from release of food subsidy, along with salary and pension credit by the end of the month.

“The liquidity deficit would vanish. Liquidity would turn positive from the deficit zone owing to month-end spending (by the government) in the form of salary and pension credits. Further, release of food subsidies will also support system liquidity," a senior money market dealer, who does not wish to be identified, said on Monday.

A similar sentiment was expressed by Indranil Sen Gupta, Economist-Asia Pacific, Bank of America Merrill Lynch, earlier this month, in a research note. “We expect the money market to switch to reverse repo mode by end-May as cash demand from elections and the on-going harvest subsides. Our liquidity model suggests that it will swing to surpluses of Rs 8,000 crore by end-May and Rs 23,000 crore by June from a deficit of Rs 68,000 crore in April,” he wrote.

Bankers believe system liquidity may turn into a surplus of Rs 88,052 crore by June 1 against a deficit of Rs 51,900 crore in the previous week.

"The liquidity deficit, despite tight conditions for most part of the week, moderated sharply on Friday to end the week at Rs 17,100 crore, led primarily by aggressive government spending. Government spending since the beginning of FY20 had been modest, probably due to the election code of conduct. With the elections out of the way, we can expect government spending to pick up pace in the coming weeks," wrote Upasna Bhardwaj, Economist with Kotak Mahindra Bank, in a note on Monday.

This would mean that the government’s cash balance may deteriorate in the coming week from the current holding of around Rs 62,350 crore as on May 24 on account of GST related inflows.

Adding to this, increase in currency in circulation (CIC) remains tepid, with a modest increase of Rs 6,027 crore to Rs 22.09 lakh crore in the week ending May 17.

Tracking the tighter liquidity for most part of the last week, the overnight rates moved up; the weighted average overnight rates were at 5.95 per cent against earlier week’s average of 5.92 per cent.

Meanwhile, certificate of deposit rates moderated across the curve with the three-month CD rate softening by around 20 basis points to trade around 6.65-6.70 per cent.

At the long end of the curve, the one-year CD rate moderated by 40-50 bps to currently trade at around 7.20-7.30 per cent, led by expectations of monetary and liquidity easing measures.

With an eye to advance tax payout by June 15, the RBI last week announced an open market operations (OMO) purchase auction of Rs 15,000 crore on June 13.

However the greatest support will come from gilt redemption worth Rs 52,188 crore in June, including the redemption of 7.28 per cent-2019 bond worth Rs 41,1188 crore on June 3 and 6.05 per cent-2019 bonds worth Rs 11,000 crore on June 12.

 — TickerNews Service