RBI Sucks Out Rs 6 Lakh Crore Bank Liquidity Following a Surge
Banks show weak demand for RBI’s VRRR auctions amid a massive liquidity surplus
Mumbai: With India’s banking system liquidity surplus rising at a record Rs 10.73 lakh crore ($105.86 billion), driven by robust inflows into dollar deposits, the central bank on Monday intensified its liquidity‐absorption measures.
The RBI mopped up over Rs 6 lakh crore of excess funds from the banking system in two auctions, which saw an underwhelming response from banks. As against Rs 7 lakh crore of notified amount, the first auction received a tepid response, with bids of just over Rs 2.59 lakh crore being received for the 30-day Variable Reserve Repo Rate (VRRR).
The RBI then announced an additional overnight auction which received a better response with bids of Rs 3.53 lakh crore received against a notified amount of Rs 5 lakh crore.
VRRR auction allows the RBI to temporarily absorb excess cash from banks and keep short-term interest rates aligned with its monetary policy rate.
Says Madhavi Arora, lead economist at Emkay Global, “Limited success of the VRRRs imply that the overnight rates could stay lower than the policy rates unless some other durable tools of sterilisation are taken by the RBI.”
Bankers said that at a time when the monsoon is sub-par, crude prices are elevated due to the ongoing West Asia conflict and there is a chance of Fed hiking rates, the RBI cannot afford to leave the banking system in such an abundant surplus. The RBI will likely have to resort to more forex sales and VRRR (which it has already been doing) alongside open market operations sales and Incremental Cash Reserve Ratio (ICRR).
The RBI has stepped up liquidity absorption operations as the banking system has been flooded with funds following large inflows through the special FCNR(B) deposit scheme.
The RBI’s special swap windows raised a cumulative $136.3 billion by end-August, with the highest contribution (92 per cent) by FCNR(B) deposits at $126 billion, while the rest were via offshore borrowing facilities.
The mobilisation brought foreign currency into the banking system, while subsequent swaps with the RBI provided banks with rupee liquidity.