Tepid response to RBI's two-day VRRR auction; banks park Rs 1,850 crore

The 2 day variable rate reverse repo auction (VRRR) that was conducted by the Reserve Bank of India on Wednesday received tepid response from the banks as they parked only Rs 1,850 crore against the notified amount of Rs 75,000 crore.

While liquidity conditions have eased since the last week of May, banks are wary of participating in the VRRR auctions as there will be advance tax outflows by the middle of the month which will drain liquidity.

The central bank infuses liquidity into the banking system using repos and sucks it out using reverse repos.

This week, both on Monday and Tuesday, surplus liquidity in the banking system crossed Rs 2 trillion.  The surplus on Monday was Rs 2.26 trillion while on Tuesday it was Rs 2.11 trillion.

“The banks have been staying cautious while deploying their surplus funds in VRRR on account of monetary policy, which will be announced on Thursday. More importantly they will look for the tone of the policy,” said Madan Sabnavis, chief economist, Bank of Baroda.

On Tuesday, against a notified amount of Rs 75,000 crore in a 3 day VRRR auction, banks parked Rs 32,375 crore.

Liquidity conditions were tight last month amid strong credit off take but easing significantly since the last week of May amid increase in government spending and the central bank’s decision to withdraw the Rs 2,000 note.

According to latest RBI data, currency in circulation as on June 2 was Rs 34.14 trillion, a decline of Rs 27,277 crore over the previous week. The withdrawal of Rs 2,000 bank note started from 23 May, and will be allowed till September 30.