New Delhi [India], October 27 (ANI): Tightening liquidity in the banking system has pushed up short-term borrowing rates and prompted the Reserve Bank of India (RBI) to inject funds into banks, while rising oil prices are adding pressure on government bond yields, according to a report by ICICI Bank.

The report said the banking system's surplus liquidity fell sharply due to Goods and Services Tax (GST) payments, higher cash reserve requirements and other factors. The surplus stood at Rs 50,000 crore, or 0.2 per cent of net demand and time liabilities (NDTL), as of October 23.

"System liquidity surplus declined sharply on account of outflows for GST payments, which led to the RBI conducting VRR operations," the report said.

The RBI has started conducting variable-rate repo (VRR) auctions to provide short-term funds to banks, including a seven-day operation worth Rs 1 lakh crore, the report added.

The tighter cash position pushed the weekly average call rate, the rate at which banks borrow from one another for short periods, to 5.70 per cent from 5.48 per cent in the previous week. The average market repo rate also rose to 5.66 per cent from 5.37 per cent, while the triparty repo rate increased to 5.65 per cent from 5.55 per cent.

ICICI Bank expects the RBI to continue these liquidity operations. However, government spending towards the end of the month and the maturity of government securities worth Rs 35,400 crore could release funds into the banking system, easing pressure on short-term rates.

Government bond yields have also come under pressure as oil prices rise amid the ongoing conflict in West Asia, raising concerns about inflation and the possibility of higher interest rates. Weak demand at the Centre's government securities auction reflected negative market sentiment, the report said.

The average cost of government borrowing at the auction rose by 20 basis points to 7.60 per cent, while the bid-to-cover ratio stood at 1.9, below the long-term average of 2.8. The ratio measures demand for government securities against the amount offered.

ICICI Bank expects the 10-year benchmark government bond yield to trade between 7.40 per cent and 7.60 per cent in the near term. It cautioned that elevated oil prices could weigh on bond prices.

Markets will also watch the US Federal Reserve's policy decision this week, along with decisions by the European Central Bank and the Bank of Japan and US third-quarter GDP data, the report said. (ANI)