To be in funds, banks hold back at the VRRR auction

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Despite the surplus of liquidity, there was a muted response from banks to the 14-day reverse repo auction (VRRR), as advance tax inflows in mid-June and holding firm credit can create mismatches, which they want to avoid.

For the reported amount of ₹2-lakh crores, banks parked ₹50,868 crores in the VRRR auction at a weighted average rate of 6.49 per cent. The previous two VRRR auctions also saw a muted response from banks. The auctions held on 21 April and 4 May received bids of ₹20,480 crore and ₹8,447 crore, respectively, for the reported amount of ₹50,000 crores.

permanent liquidity

Rama Chandra Reddy, Head of Treasury Department, Karur Visya Bank, said: “There has been an increase in permanent liquidity — due to the deposit of $2,000 notes in bank accounts — in the system. But banks don’t want to stop at funds at this rate (6.49 per cent). If banks get money market money at 6.25% or less, it is ok to stop the borrowed money at 6.49%.Otherwise, it is not profitable to spread the money at VRRR.Even if we borrow money overnight at 6.25%,the cost of Borrowing for the next 13 days is uncertain.”

Currently, money market rates are hovering overnight in the range 6.30-6.39 percent. “From June 15th onwards, there will be tax advance outflows. In the June quarter, there will also be outflows on account of other tax payments. Banks are not keen on booking funds,” Reddy added.

He noted that the expected liquidity is good because the government can start spending the Rs.87,416 crore earnings it has received from the RBI and the tax inflows it will accrue in the current quarter. Therefore, when this money is released into the system, it will become permanent liquidity.

– ‘lack’

Madan Sabnavis, chief economist, Bank of Baroda, said that if banks commit funds for a longer period at VRRR, liquidity may run short later on. “Because the funds are locked up for two weeks at VRRR, relatively small amounts are stopped out. If banks use the excess funds at VRRR and demand for credit appears, they will face shortages. It is then likely that the RBI will come out with a variable rate buyback auction, where Banks have to pay more to borrow.”

The system’s liquidity is comfortable and will continue to be more comfortable as $2,000 notes are deposited in banks, Sabnavis assesses.

Madhavi Arora, Chief Economist, Emkay Global Financial Services, said that the Reserve Bank of India conducted the VRRR auction as there was excess liquidity, which is probably due to some government spending in the wake of the dividend announcement by RBI, two large redemptions of government securities that took place. In the past two weeks, as well as some fleeting liquidity that entered the banking system due to the deposit of banknotes in the amount of 2,000 rubles.

“Banks are cautious when it comes to parting with liquidity because RTGS (Real Time Gross Settlement) transactions can lead to sudden mismatches,” she said.