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Despite having surplus liquidity, there was muted response from banks to the 14-day variable rate reverse repo (VRRR) auction on Friday, as advance tax outflows in mid-June and steady credit offtake could create mismatches, which they want to avoid.
Against the notified amount of ₹2-lakh crore, banks parked ₹50,868 crore at the VRRR auction at the weighted average rate of 6.49 per cent. The previous two VRRR auctions, too, had seen muted response from the banks. The auctions held on April 21 and May 4 received offers of ₹20,480 crore and ₹8,447 crore, respectively, against the notified amount of ₹50,000 crore.
Durable liquidity
Rama Chandra Reddy, Head-Treasury, Karur Vysya Bank, said: “There has been an increase in durable liquidity — due to ₹2,000 banknotes being deposited in bank accounts — in the system. But banks don’t want to park at funds at this (6.49 per cent) rate. If banks get funds from the money market at 6.25 per cent or less, they will be okay parking the borrowed funds at 6.49 per cent. Otherwise, it is not lucrative to deploy funds in VRRR. Even if we borrow overnight funds at 6.25 per cent, the borrowing cost for the next 13 days is uncertain.”
Currently, the overnight money market rates are hovering in the 6.30-6.39 per cent band. “From June 15 onwards, there will be advance tax outflows. In the June quarter, there are also outflows on account of other tax payments. So, banks are not keen on locking up funds,” Reddy added.
He observed that the projected liquidity is good because the government could start spending the ₹87,416 crore dividend it received from the RBI and tax flows that will accrue to it in the current quarter. So, when these funds get released into the system, this will become permanent liquidity.
‘Run into shortage’
Madan Sabnavis, Chief Economist, Bank of Baroda, said if banks commit funds for a longer period in VRRR, they could run short of liquidity subsequently. “Since funds get locked up for a fortnight in VRRR, relatively small amounts are parked. If banks deploy surplus funds in VRRR and credit demand emerges, they will run into shortage. Then probably, the RBI will have to come out with variable rate repo auction, where banks have to pay more to borrow,” he said.
System liquidity is comfortable and will keep getting more comfortable as ₹2,000 banknotes get deposited in banks, per Sabnavis’ assessment.
Madhavi Arora, Lead Economist, Emkay Global Financial Services, said the RBI conducted the VRRR auction because there is surplus liquidity, which is probably due to some government spending in the wake of dividend declaration by the RBI, two large redemptions of government securities that happened in the last two weeks, plus some transient liquidity which has entered the banking system due to ₹2,000 banknotes getting deposited.
“Banks are cautious when it comes to parting with liquidity as RTGS (real-time gross settlement) transactions could lead to sudden mismatches,” she said.
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