RBI presses ahead with VRRR to suck out excess liquidity from banking system

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The Reserve Bank of India (RBI) continued to forge ahead Variable rate reverse repo auctions (VRRRs) to absorb excess liquidity from the banking system since June 30, in line with its monetary policy stance to remain focused on withdrawing facilities.

The central bank, on Friday, conducted a 4-day VRRR for ₹2-lakh crores. The banks netted collectively ₹1,06,224 crore at a cut-off rate of 6.49 per cent.

RBI has been conducting a VRRR every day since June 30 to ensure the overnight call money price is close to its target rate of 6.50 percent, according to market experts.

Governments (central and state) usually pay contractors and pay salaries at the end of the month or the first week of the next month. Therefore, banks have inflows. Moreover, the return of the 2,000 rupee notes by the public adds to the systemic liquidity. “So, RBI is doing VRRR,” said R.C. Reddy, Head of Treasury, Karur Visya Bank.

CARE Ratings, in one of the reports, mentioned government spending at the end of the month and filing 2000 dollar bills led to a rise in liquidity surplus above ₹2-lakh crores since 3rd July.

The Reserve Bank of India (RBI) recently said that the ₹2.72-lakh crore, or 76 per cent of the ₹2,000 notes in circulation on May 19, has returned to the banking system as of the end of June.

Of the total $2,000 in bills received as of June 30, about 87 percent was in the form of deposits and the remaining 13 percent was exchanged for other banknotes.

As a result, the average monthly liquidity surplus was INR 1.24 crore, over the past month, up from INR 97,139 crore a month earlier. Going forward, the Reserve Bank of India (RBI) could continue to intervene through reverse repo auctions to keep liquidity close to neutral,” the ratings agency said.