MUMBAI, Sept 18 (Reuters) – Income tax-related outflows have tightened rupee liquidity in India, driving up daily funding costs and prompting banks to tap the foreign exchange swap market to raise funds.
Surplus rupee liquidity in the banking system fell below 700 billion rupees ($7.96 billion) on Wednesday, the lowest in over four months, Reserve Bank of India (RBI) data showed. The decline followed advance corporate and personal income tax payments, which faced a Monday deadline.
In response, the weighted average tri-party repo (TREPS) rate rose to 5.52%, up about 8 basis points from Wednesday, while the overnight call rate touched 5.65%, its highest level in four weeks.
To raise rupee funds, banks turned to sell/buy dollar/rupee one-day swaps, pushing rates higher in the FX swap market.
The Wednesday-Thursday swap rate climbed to 0.50 paisa, implying a rupee interest rate of over 6%, indicating banks are willing to borrow at elevated costs via swaps.
“FX swap rates have been trending higher over the past two days, reflecting the ongoing and expected tightness in rupee liquidity,” said a currency trader at a mid-sized private sector bank, who declined to be named since he is not authorised to speak to media.
“The pressure (on liquidity) is evident across markets,” the trader added, noting that the tightness followed a three-day variable rate repo (VRR) for 750 billion rupees conducted by the RBI on Tuesday, which drew a weak response.
Banks are now paying rates above 5.51%, the level at which the RBI was offering to inject funds.
Amid the liquidity crunch, the RBI announced it will conduct a one-day VRR auction on Friday, infusing 250 billion rupees. Market participants said the auction size was relatively small.
Liquidity conditions are expected to remain tight in the coming days due to upcoming Goods and Services Tax (GST) payments.
($1 = 88.0400 Indian rupees)
(Reporting by Nimesh Vora)
