Banks bid enthusiastically on Friday at the variable rate repo (VRR) auction to draw liquidity from the Reserve Bank of India amid liquidity tightness in the banking system.

At the 14-day VRR auction, the central bank received bids for liquidity infusion aggregating ₹1,95,115 crore from banks, against the notified amount of ₹1.25-lakh crore.

The central bank accepted bids aggregating ₹1,25,009 crore at a weighted average rate (WAR) of 6.68 per cent.

The auction came in the backdrop of maturity of the VRR auctions conducted on May 3 (14-day), May 13 (4-day) and May 14 (3-day).

The RBI had infused ₹1,57,698 crore on May 3 via VRR auction; ₹25,004 crore on May 13; and ₹50,002 crore on May 14.

All these monies borrowed from the RBI had to be returned on Friday. Hence, the central bank conducted the VRR auction to help banks tide over liquidity deficit.

Liquidity tightness is also underscored by the fact that banks borrowed 14-day money from RBI at a WAR 6.68 per cent, 15 basis points up vis-a-vis the May 3 auction.

At all VRR auctions, barring one, conducted by RBI in the current month so far, the demand for funds has been more than the notified amount.

At the May 3rd VRR auction, the demand for funds (₹1,57,698 crore) was lower than the notified amount (₹1.75-lakh crore).

Madan Sabnavis, Chief Economist, Bank of Baroda, observed that overall, there is a liquidity deficit in the banking system.

“This deficit has been there for quite some time. ₹1.50-lakh crore deficit is what we are seeing on a daily basis.

“However, RBI is infusing liquidity via VRR auction. But there is also lot of money being parked in SDF (standing deposit facility),” he said.

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