Surplus liquidity of banks may dip on tax outflows, higher currency demand

This surge in surplus liquidity over the past few days was driven by the deposit of Rs 2,000 notes withdrawn from circulation last month in banks, the redemption of government bonds and higher month-end spending by the government.

“In a week, we have advance tax and excise payments. Also, during the agriculture season, there is usually currency leakage in the system, which means people tend to hold currency in the rural sector. Liquidity can change significantly over a period of days,” said Abheek Barua, Chief Economist, HDFC Bank.

The last date for payment of advance tax and goods and services tax is June 15 and June 20, respectively.

Analysts expect the surplus liquidity to come down to around Rs 1.3-1.5 lakh crore by month-end. Though RBI does not target any particular level of liquidity in the banking system, it is comfortable with surplus liquidity hovering at Rs 1.1 to 1.5 lakh crore range, analysts said.

The central bank acts if the liquidity levels fall or rise above its comfort level. It has been conducting variable-rate reverse repo auctions for the last few days. The surplus liquidity declined to Rs 2.11 lakh crore on June 6 from Rs 2.59 lakh crore on June 4.

Market participants attribute this to the sale of dollars by the RBI to defend the rupee, which has witnessed pressure after the US currency appreciated after strong US Jobs data.

When the RBI sells dollars, the rupee liquidity reduces from the banking system, said a senior treasury market dealer with a state-run bank.

The rupee closed at 82.55 against the dollar on Wednesday, compared to 82.61 on Tuesday. The local currency fell to 82.71 against the dollar during the intraday trades on June 1 before closing at 82.68.