India banking liquidity to tighten as long-term repos mature
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India's banking system liquidity is likely to tighten further on a more persistent basis with upcoming tax outflows and maturing repurchase agreements with the central bank, analysts said.
"As we progress into FY24, we expect liquidity deficit conditions to become more persistent on our expectation of a mild BoP (balance of payment) deficit and usual currency leakage seen during the year," Gaura Sen Gupta, economist with IDFC First Bank, said.
Banking system liquidity deficit widened to 1.11 trillion rupees ($13.46 billion) after advance tax payments, its highest since April 2019 and will rise further after outflow towards Goods and Service Taxes next week.
"I do not see liquidity turning into any meaningful surplus unless there is a lot of dollar inflow and the RBI tries to defend. But as a base case, I expect it to remain on the tighter side," said Ashhish Vaidya, managing director and head of treasury & markets at DBS Bank India.
Durable liquidity is also set to decline as funds infused by the Reserve Bank of India in the form of Targeted Long term repos (TLTRO) three years ago is scheduled to mature. The system will see an outflow of over 730 billion rupees in the next five weeks, traders said.
Banking system liquidity in billion rupees https://www.reuters.com/graphics/INDIA-MARKETS/zdvxdqryyvx/chart.png
"We are not expecting any major foreign inflows in April, so there may not be much support and conditions should tighten. The RBI may not undertake proactive action but will not intervene in natural process of (liquidity) tightening," said Abhishek Upadhyay, senior economist at ICICI Securities Primary Dealership.
Tight liquidity could also aid the RBI's inflation management task, traders said. The apex bank has already raised the repo rate by 250 basis points in the current cycle to bring CPI within its 2-6% target band.
"The RBI will have to keep tight liquidity conditions as inflation is still elevated and they cannot keep on increasing rates, as growth is starting to get impacted," said Raju Sharma, head fixed income at IDBI Mutual Fund.
