Banks show little appetite for Reserve Bank of India’s 30-day VRRR bid | Finance News

The Reserve Bank of India (RBI) received tepid demand at its 30-day variable rate reverse repo (VRRR) auction for a notified amount of ₹7 trillion on Monday, as banks were reluctant to park funds for the long term, dealers said.

The RBI received bids worth ₹2.59 trillion against the notified amount at the 30-day auction. Market participants had expected bids of up to ₹5 trillion, making the actual response well short of expectations. The 30-day VRRR auction offered an option for premature reversal, a first for a VRRR auction.

The central bank announced a ₹5 trillion overnight VRRR auction after the first auction. Bids at the overnight VRRR auction were stronger, at ₹3.53 trillion against the notified amount.

Net liquidity surplus in the banking system stood at a record ₹11.16 trillion on Sunday, latest RBI data showed. Net liquidity was in a surplus of ₹10.73 trillion and ₹11.12 trillion on Friday and Saturday, respectively.

Market participants said banks were cautious about parking funds for the long term due to the upcoming goods and services tax (GST) and advance tax outflows. “There will be GST and advance tax outflows in the coming days, which should suck out some liquidity for some time. So, we’ll have to see how liquidity evolves from here,” said a senior banker.

The RBI plans to conduct another overnight VRRR auction worth ₹5 trillion on Tuesday.

The overnight weighted average call rate — the operating target of monetary policy — was trading below the standing deposit facility (SDF) rate and settled at 4.97 per cent, against the previous close of 3.87 per cent on Saturday. The overnight rate had settled at 4.94 per cent on Friday.

The SDF rate, which currently stands at 5 per cent, is the interest rate at which banks park their surplus funds with the RBI without providing collateral. It forms the lower bound of the RBI’s policy corridor, with the repo rate in the middle and the marginal standing facility rate at the upper bound.

Banks parked ₹2.46 trillion under the central bank’s SDF window on Sunday, latest data showed.

Strong inflows under the central bank’s swap scheme have led to a surge in banking system liquidity. Market participants have suggested sell/buy swaps to the RBI to absorb excess liquidity and align the overnight rate with the repo rate. The policy repo rate currently stands at 5.25 per cent.

“The RBI will look at other measures to absorb the liquidity, as banks are not willing to participate in long-term VRRR,” said the treasury head at a private bank. “Banks have suggested sell/buy swaps, which we are expecting will be announced before the monetary policy committee,” the person added.