RBI Increases Liquidity Support to Banks as Tight Conditions Push Up Short-Term Borrowing Costs: ICICI Bank

New Delhi, Oct 27 (KNN) Tightening liquidity conditions in the banking system have pushed up short-term borrowing costs, prompting the Reserve Bank of India (RBI) to inject funds into banks. Meanwhile, rising crude oil prices have exerted additional pressure on government bond yields, according to an ICICI Bank report.

The report attributed the sharp decline in surplus liquidity to goods and services tax (GST) payments, higher cash reserve requirements and other factors. As of October 23, the banking system's liquidity surplus stood at Rs 50,000 crore, equivalent to 0.2 per cent of net demand and time liabilities (NDTL).

“System liquidity surplus declined sharply on account of outflows for GST payments, which led to the RBI conducting VRR operations,” ANI reported, citing the report.

RBI Injects Funds Through VRR Auctions

The RBI has conducted variable-rate repo (VRR) auctions to provide short-term liquidity to banks, including a seven-day operation worth Rs 1 lakh crore, the report noted.

Tighter liquidity pushed the weekly average call rate to 5.70 per cent from 5.48 per cent in the previous week. The average market repo rate rose to 5.66 per cent from 5.37 per cent, while the triparty repo rate increased to 5.65 per cent from 5.55 per cent.

ICICI Bank expects the RBI to continue liquidity operations. However, government spending towards the month-end and the maturity of government securities worth Rs 35,400 crore could release funds into the banking system and ease pressure on short-term rates.

Oil Prices Weigh on Government Bond Yields

Government bond yields have also faced upward pressure from rising oil prices amid the West Asia conflict, raising concerns over inflation and the possibility of higher interest rates.

Weak demand at the Centre's government securities auction reflected negative market sentiment. The average borrowing cost rose 20 basis points to 7.60 per cent, while the bid-to-cover ratio stood at 1.9, below its long-term average of 2.8.

The bid-to-cover ratio measures demand for government securities relative to the amount offered.

ICICI Bank expects the 10-year benchmark government bond yield to trade between 7.40 per cent and 7.60 per cent in the near term, cautioning that elevated oil prices could weigh on bond prices.

Markets will also track the US Federal Reserve's policy decision this week, along with decisions by the European Central Bank and the Bank of Japan and US third-quarter GDP data, the report said.

(KNN Bureau)