MUMBAI: The daily banking system liquidity is turning closer to surplus in India as cash shortage has persistently narrowed since December 3.

This indicates that central bank’s bond purchases have helped enhance liquidity over past few months. Also, government is said to have started spending more after last month’s Goods and Services Tax collections.

This, in turn, has increased liquidity in banking system. In past one month, central bank has announced purchase of Rs 60,000 crore worth of bonds that helped increase liquidity.

Shaktikanta Das, new Reserve Bank of India (RBI) Governor, assumed office on December 11. Before that date, central bank had conducted open market operations of about Rs 1.40 lakh crore. “Market liquidity has improved somewhat during week,” said Naveen Singh, head of fixed income at ICICI Securities Primary Dealership.

“While government spending after December advance taxes led to improvements, RBI’s bond purchases (OMO) aided banking system in turning closer to surplus from deficit.

A sustained liquidity deficit could also alter overnight rates, changing market dynamics.” For example, one-year Treasury Bill, or short-term sovereign paper, is now yielding 6.90 per cent compared with 7.75 per cent in October, a fall of 85 basis points.

The benchmark bond yields have also dropped during period. On January 2, cash shortage in banking system shrank to just Rs 2 crore (net), show data from Bloomberg.

The liquidity gauge was in deficit range of Rs 165-2,365 crore (net) in December. “Liquidity worries are receding fast amid increased RBI open market operations and stability in FPI flows,” said Soumyajit Niyogi, associate director at India Ratings and Research.

“The central bank looks comfortable with a banking system liquidity that is marginally deficit for time being, and scope for large OMO purchase in next two months appears low.” On October 22, bank borrowing peaked at Rs 1.4 lakh crore.

The liquidity shortage in banking system was magnified in broader market as non-banking finance companies (NBFCs) found it difficult to raise money from mutual funds. The RBI’s stated stance is to maintain neutral liquidity -- neither deficit, nor surplus.

Das, of late, has hinted that he is comfortable with a “slight deficit.”