Advance tax outflows the reason for banks’ tepid response to VRRR auctions

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The imminent pre-tax inflows are why banks have not taken full measure in the RBI’s variable rate reverse repo (VRRR) auctions over the past few days, according to the central bank’s assessment.

Overall, in the last four VRRR auctions, banks posted accumulated ₹1,51,733 crores against the notified cumulative amount of ₹4.50 crores. Market experts say banks are conserving liquidity because advance tax payments will trigger outflows in mid-June and create a temporary liquidity mismatch.

M. D. Batra, RBI Deputy Governor, said: “The reason for the caution among banks is that there are imminent tax inflows, which are always large, which will happen in the next week. So, they are booking money for this. But as you have seen, we have been persistent. In our efforts and the fact that we have repeated our auctions indicates our goal which is what we wanted to convey.”

Batra stressed that it is important, therefore, to withdraw that excess liquidity so that the easing of the deposit rate and the lending rate are more in line with the interest rate cycle and that is why the RBI has withdrawn ₹1.5 crore so far.

Asked whether RBI prefers VRRR over Variable Repo Auction (VRR), Governor Shaktikanta Das said, “Whether there is a preference for VRR or VRRR depends on the prevailing market situation and we will remain agile, flexible and act swiftly as we have over the past four days. .

“We will do (liquidity management) operations from two sides as per the requirements. There is still some amount of liquidity out there and when we say banks are cautious, let us remember that through VRRR auctions till yesterday around Rs 1.50 crore was cleared through VRRR operations.”

Das emphasized that it is imperative that no market segment prematurely assume certain things and then start depressing prices, both on the asset side and on the deposit side.

“…banks are free to do this (decide on deposit and lending rates, their own trading decision), but if they do so on the assumption of certain action that the RBI is likely to take, I think that would be wrong.

“Our liquidity measures should also be viewed in the context that our monetary policy stance and policy rate are well aligned with the prevailing market interest rates including banks.”