Banking Liquidity Crunch: Overnight Rates Soar Above RBI Repo Rate

• Overnight rates surged 10-15 basis points above RBI's 5.25% repo rate due to a banking system liquidity crunch.
• Advance tax payments by companies caused a sudden, significant outflow of funds, increasing short-term borrowing costs.
• The liquidity shortage was most acute around December 17, with weighted average call money rates reaching 5.46%.
• This marks the third liquidity deficit in FY26, despite RBI's previous measures like VRR and OMOs to maintain surplus.
• Market experts expect the situation to normalize soon as funds return through government spending and potential RBI interventions.

Why It Matters: Banking system faces liquidity crunch due to advance tax payments, pushing overnight rates above RBI repo.