With liquidity drying out temporarily during the end of the financial year because of Goods and Services Tax (GST) and advance tax, banks put in bids aggressively for the three variable report rate (VRR) auctions on Friday. The Reserve Bank of India (RBI) received bids of Rs 2.78 trillion – more than double the VRR auctions’ amount of Rs 1.25 trillion.
In the first VRR auction banks placed bids worth Rs 1.3 trillion against the notified amount of Rs 50,000 crore while in the second lenders placed bids worth Rs1 trillion against notified amount of Rs 25, 000 crore. For the third auction, RBI received bids worth Rs 40,700 crore against notified amount of Rs 50,000 crore.
“Liquidity has tightened due to payments for advance tax and GST. Two VRRs worth Rs 1.25 trillion, which were conducted earlier, matured today,” V Ramachandra Reddy, head of treasury, Karur Vysya Bank told FE, adding that with the three VRRs conducted today, the central bank has replenished the banking system by infused the same amount of liquidity, thereby ensuring that the banks are not starved of cash.
According to industry players, around Rs 2 trillion has been sucked out of the system due to advance tax and GST payments. Earlier this week, state governments raised record amount by selling bonds which also put strain on liquidity. On March 19, states and union territories raised Rs 50,206 crore through auction of State Government Securities (SGS), which was the largest-ever weekly borrowing.
“The tenor of today’s auction shows that RBI expects the liquidity situation to improve in coming days,” said head of treasury of a public sector bank. “The tenor of two auctions is 4 days while the tenor of the third auction is 14 days. Central bank has infused funds for shorter period because it expects government spending to increase in coming days,” he added.
The tenor of auctions shows that the central bank has infused Rs 1 trillion for four days as the notified amount of the two 4-day VRRs was Rs 50,000 crore each.
After staying in surplus in the first half of March, the liquidity has tightened once again. According to RBI, liquidity deficit reached Rs 1.38 trillion March 21 from Rs 97,529 crore on March 20. RBI has conducted multiple VRRs in March to infuse liquidity in the system. A repo auction is conducted by the central bank to inject liquidity into the banking system. Banks can obtain liquidity overnight through RBI’s marginal standing facility when interbank liquidity dries up.
