Banks showed a tepid interest in the variable rate reverse repo (VRRR) auction conducted by the Reserve Bank of India (RBI), indicating that lenders are reluctant to part with their surplus funds.
In the 14-day VRRR auction held by the central bank on Friday, banks parked a total of Rs 20,377 crore, representing merely 20% of the notified amount of Rs 1 trillion, according to data released by the RBI.
“Liquidity surplus in the banking system has declined in the past two weeks which has made banks cautious in blocking funds for two weeks,” the head of treasury of a public sector bank told FE.
Liquidity surplus has fallen in the current month as the central bank has increased the pace of VRRR auctions to absorb excess cash. From the high of Rs 2.78 trillion on August 6, the liquidity surplus has declined to Rs 1 trillion on August 22.
Liquid surplus in the banking system crossed the Rs 2.5-trillion mark in the first week of this month, driven by an increase in government spending. The current month started with a surplus of Rs 1.96 trillion on August 1, which increased to Rs 2.5 trillion on August 2 and reached Rs 2.78 trillion on August 6, according to the RBI data.
The central bank has conducted five VRRR auctions in the first week of the current month. The auction for Rs 1.5 trillion on August 2 received bids worth Rs 60,000 crore from banks while the Rs 1-trillion VRRR auction on August 5 received bids for Rs 79,000 crore.
In the current week also, banks’ response to VRRR auctions was muted. On August 20, the RBI received bids worth Rs 875 crore, against the notified amount of Rs 25,000 crore, while on August 19, the bid size was Rs 21,685 crore, against the notified amount of Rs 75,000 crore.