Banks have shown a distinct preference for conserving liquidity, deploying funds much lower than the notified amount at the last four variable rate reverse repo (VRRR) auctions conducted by the Reserve Bank of India.

While RBI’s monetary policy stance remains as “withdrawal of accommodation”, banks, fearing sudden liquidity mismatches, seem to be holding back on deploying funds in the auctions. Banks offered funds aggregating only ₹1,850 crore at the 2-day VRRR that RBI conducted on Wednesday against the notified amount of ₹75,000 crore. The central bank accepted the funds at a weighted average rate of 6.49 per cent.

Overall, in the last four VRRR auctions, banks deployed funds aggregating ₹1,51,733 crore, against a cumulative notified amount of ₹4.50-lakh crore. Market experts say banks are preserving liquidity as advance tax payments will lead to outflows in mid-June.

Also read: 3-day VRRR auction receives relatively better response from banks

Liquidity outlook

CARE Ratings, in a report, noted that the banking system saw an average monthly surplus of around ₹72,000 crore in May largely on account of government spending and maturity of government securities. In the first two months of the fiscal year, total government security (G-Sec) redemption amounted to ₹1.45-lakh crore.

“RBI’s transfer of ₹87,416 crore as surplus to the Central Government for the accounting year 2022-23 is also a positive for liquidity... the withdrawal of ₹2,000 currency notes could also bode well for liquidity in the short-term... given that ₹13,156 crore worth of G-Sec redemptions are due in June, it is likely that RBI would continue to withdraw excess liquidity via reverse repo auctions,” the agency said.