The Reserve Bank of India (RBI) on Friday received bids worth Rs 1.95 trillon from banks, against the notified amount of Rs 1.25 trillion, at the variable rate repo (VRR) auction, reflecting a high demand for cash from lenders amid tight liquidity conditions. Banks borrowed the amount at a weighted average rate of 6.68%.
After staying surplus in the first half of April, liquidity in the banking system has returned to deficit in May as government spending declined due to ongoing general elections. The average system liquidity slipped into deficit of Rs 1.2 trillion for the first 15 days of May, against a surplus of Rs 20,240 crore in April.
“System liquidity, albeit being in deficit, will get comfort from the faster pace of growth of deposits compared to credit which is seen currently. Further, slower pace of accretion in currency in circulation compared to same period of last year is not expected to put any untoward pressure on liquidity,” said Dipanwita Mazumdar, an economist with Bank of Baroda.
With liquidity swinging from surplus to deficit, the central bank has also stepped up it efforts to infuse short-term funds into the system. The RBI conducted 14-day VRR auction for a notified amount of Rs 1.75 trillion on May 3 for which it received bids worth Rs 1.57 trillion. It held another 4-day VRR auction for a notified amount of Rs 1 trillion on April 29 for which banks placed bids worth Rs 97,000 crore.
A repo auction is conducted by the central bank to inject liquidity into the system. Banks can obtain liquidity overnight through RBI’s marginal standing facility when interbank liquidity dries up.
On Friday, there was a reversal of three VRR auctions conducted by the RBI on May 3, May 13 and May 14, totalling worth Rs 2.5 trillion, in which banks parked Rs 2.33 trillion. The RBI had conducted three-day VRR auction on May 14, four-day VRR on May 13 and 14-day VRR auction on May 3.