Banks put in lesser amounts in VRRR auctions ahead of FY22-end

Banks on Tuesday put in lower than notified amounts in the Reserve Bank of India’s (RBI’s) two variable rate reverse repo (VRRR) auctions for Rs 1.5 trillion as they predominantly preferred to maintain cash on their books ahead of the close of FY22.

The three-day VRRR auction for Rs 1 trillion saw offers for Rs 67,422 crore. The RBI accepted the amount with a cut-off rate of 3.99 per cent. The 28-day VRRR auction for Rs 50,000 crore saw banks putting in Rs 47,190 crore. Bankers said the demand from customers remained high at the end of March and banks wanted to keep some liquidity with them.

Also the RBI sold dollars, which sucked out part of rupee liquidity. The combined effect is less subscription than the notified amount.

The RBI has been conducting VRRR auctions to manage surplus liquidity in the system. It conducted an eight-day VRRR auction on March 17, absorbing about Rs 57,000 crore.

Treasury executives said the liquidity surplus in the banking system continued to be sizable and the RBI had restored the revised liquidity management framework to rebalance the surplus. Under this framework, it is using variable rate repo (VRR) and VRRR as the main liquidity management tools.

CARE Ratings, in its weekly review, said the liquidity surplus narrowed sharply in the holiday-truncated week ended March 17. This can be because of outflows towards advance tax payments as well as those for fiscal year-end payment settlements.

The average banking system liquidity surplus, at Rs 5.78 trillion, declined in the week ended March 18 against Rs 7.24 trillion in the previous week.

The RBI in its bulletin (March 2022) said increased government spending became the principal, autonomous driver of liquidity in this period. This is despite higher leakage in the form of currency in circulation on account of the Assembly elections and the rabi harvesting season.

Average daily absorption under the fixed rate reverse repo window stood at Rs 1.7 trillion while the bulk of the absorption was effected through VRRR auctions (both main and fine-tuning), reflecting liquidity rebalancing through the migration of surplus liquidity towards longer tenors, the RBI said.

The liquidity surplus in the banking system pulled down overnight money market rates, with the weighted average call rate, the tri-party repo, and the market repo rate close to the reverse repo rate.

Interest rates on longer-term money market instruments such as the three-month T-bill and certificates of deposit, however, remained higher, with their respective spreads over the reverse repo rate averaging 38 bps and 60 bps during the second fortnight of February through March 11, 2022.