Banks seem to be losing appetite for drawing short-term funds, going by the demand at the daily variable rate repo (VRR) auction conducted by the Reserve Bank of India (RBI).
Funds drawn by them as a percentage of the notified amount has been in the range of 16-23 per cent at the daily VRR auctions conducted in the last four days.
For example, at the 3-day VRR auction on Friday, banks bid for funds aggregating only ₹3,970 crore against the notified amount (willingness of RBI to give funds) of ₹25,000 crore.
The RBI started conducting daily VRR auctions from January 16, 2025 in view of tight liquidity conditions in the banking system. It decided to undertake these auctions (until further notice) on a review of current and evolving liquidity conditions.
Short-term liquidity
Treasury officials say short-term liquidity is comfortable in the banking system. Hence, VRR auctions are getting a lukewarm response. Banks are looking for durable liquidity to minimise asset-liability mismatches.
V Rama Chandra Reddy, Head – Treasury, Karur Vysya Bank, emphasised that VRR auctions have helped keep overnight rates around the repo rate (6.25 per cent). However, the underlying issue -- the lack of durable liquidity -- persists.
“Looking at the money market rates in the Commercial Paper (CP) and Certificate of Deposit (CD) markets, they remain elevated above pre-rate cut levels (of 6.50 per cent).
“Notably, the spread between 3-month CD/CP rates and overnight rates has widened significantly to 150 basis points. This is inconsistent with the expected easing of liquidity conditions,” he said.
The Treasury-Head of a private credit fund noted that banks have liquidity requirements over a longer time horizon. The overnight borrowing from RBI does not help them much as the assets they are financing are for a longer period. Hence, there is a rush among banks to raise funds via CDs.