The Reserve Bank of India’s variable rate reverse repo (VRRR) auction conducted on Thursday received a muted response from the banks. They parked only Rs 8,405 crore crore in the 15-day auction, amounting to just 5% of the notified amount of Rs 1.75 lakh crore.
“Banks are not comfortable in locking their funds in longer-duration VRRR auctions because it is difficult for them to predict the liquidity situation. Compared to longer duration auctions of 14-15 days, banks prefer to park their funds in overnight or two-day VRRR auctions, as these shorter tenures provide greater flexibility to manage their liquidity positions,” V Ramachandra Reddy, head of treasury, Karur Vysya Bank, told FE. “There will be outflows of nearly Rs 1.25 lakh crore related to GST after November 20, which may put some strain on liquidity in the month end.”
The RBI has conducted 10 VRRR auctions so far in November and most of them evoked lukewarm responses from the banks. In the VRRR auction on November 12, banks parked Rs 29,150 crore, which was just 29% of the notified amount of Rs 1 lakh crore. Similarly, the auction on November 11 got bids worth Rs 61,960, against the notified amount of Rs 1.75 lakh crore.
Bankers say that with credit demand still strong, lenders are hesitant to park their excess liquidity with the RBI.
“Credit demand is high due to ongoing festive season and the situation is unlikely to change until December this year. Banks want to use their funds to fuel credit growth,” said a senior official of a public sector bank.
The banking system’s liquidity surplus has exceeded the Rs 2 lakh crore mark, which has prompted the RBI to conduct multiple VRRR auctions in November.
According to RBI data, the liquid surplus in the banking system reached Rs 2.05 lakh crore on November 13. The central bank conducts VRRR auction to withdraw excess liquidity from the banking system.
Over the past few months, liquidity within the banking system consistently remained in surplus.