Liquidity conditions may remain easy for about 4 months

Overall liquidity conditions will remain easy, with bank deposits likely to increase by ₹2 lakh crore due to return of ₹2,000 bank notes, until cash demand goes up during the festive season starting in October, according to experts.

VRRR auctions likely

So, there could be further decline in short-term money market rates, opined Pankaj Pathak, Fund Manager-Fixed Income, Quantum Mutual Fund. “There was an expectation that the RBI might announce measures to suck out excess liquidity. The RBI did acknowledge that the deposit of ₹2,000 denomination currency notes will add to the already high liquidity surplus in the banking system. “However, they chose not to deploy any durable liquidity absorption tool to reduce the excess liquidity. Instead, they will likely conduct variable rate reverse repo (VRRR) auctions of various tenors to absorb the excess liquidity temporarily,” Pathak said.

Referring to the banking system witnessing an influx of liquidity during the last month, he said, “The main contributors to this increase in liquidity surplus were government bond maturities to the tune of ₹1 lakh crore, RBI’s buying of foreign exchange and deposits of ₹2,000 notes.”

SBI’s economic research department, in a report, noted that liquidity surplus in the system has again increased with the net liquidity adjustment facility absorption at ₹2.2 lakh crore as on June 7 from an average of ₹1 lakh crore in April-May 2023. “The government surplus cash balances has also started declining from the third week of May. Even the deposit of ₹2,000 notes in banks has added to the liquidity…About 85 per cent of the ₹2,000 notes are deposited in the bank accounts and not exchanged for smaller denominations.

“Thus, bank deposits are likely to increase by at least ₹2 lakh crore assuming some of the notes would already be with banks in currency chests. Overall deposit growth in FY24 should grow over 11 per cent y-o-y. This will effectively imply that spate of deposit rate hikes could be a thing of the past,” SBI economists said.