Intervention by RBI, festive demand lead to liquidity deficit

Core Insights - The banking system liquidity turned negative for the first time in a month, with a deficit of ₹52,299.7 crore as of October 22, primarily due to foreign exchange intervention by the Reserve Bank of India (RBI) in the currency spot market [1][5] - Core liquidity decreased significantly from ₹4.7 lakh crore to ₹3.45 lakh crore in the week of October 17, with approximately ₹20,000 crore drained due to currency leakage related to festive season demand [4][5] - Overnight rates increased to an average of 5.61%, which is 11 basis points above the repo rate, reflecting the impact of the liquidity deficit [1][5] System Liquidity Dynamics - System liquidity faced a drain of ₹1.5 lakh crore from RBI interventions, marking a notable shift from the previous surplus of ₹1.47 lakh crore in September to an average liquidity of ₹1.11 lakh crore in October [5] - The last recorded liquidity deficit occurred at the end of September, attributed to quarterly advance tax outflows [5] - The RBI conducted a 1-day variable rate repo (VRR) auction to infuse ₹50,000 crore, receiving bids of ₹475 crore, and plans to conduct another 3-day VRR auction for ₹1.25 lakh crore [5]