The RBI's VRR operations are intended to infuse liquidity into the financial system and anchor short-term money market rates closer to the policy repo rate
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Experts said the liquidity crunch is expected to be temporary and will pick up on the back of government expenditure
The Reserve Bank of India is comfortable with a liquidity surplus of around 1% of banks' deposits, which is roughly 2.5 trillion rupees
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RBI will hold two VRRR auctions on Friday with six-day and three-day tenures to absorb excess liquidity from the banking system, which has a surplus of Rs 4 trillion
System liquidity, as measured by the net position under the liquidity adjustment facility, has been in surplus, averaging ₹3 trillion per day since the last MPC meeting
Surplus liquidity in the banking system reaches Rs 4.09 trillion, with the rupee slipping to 87.66 per dollar amidst oil demand and trade tensions
With WACR and tri-party repo rates climbing, banks park only ₹13,075 crore against RBI's ₹50,000 crore offer in overnight VRRR auction
The policy, called fixed rate liquidity operations, will help banks manage their needs better, several bankers proposed to the RBI in meetings held over the last few months
The central bank's move follows rising liquidity in the system that has pulled overnight rates below the repo rate; WACR and tri-party repo rates remain under pressure
Liquidity in the system had a deficit of Rs 2.4 trillion towards the end of the last financial year (on March 23); it is now in surplus of around Rs 3 trillion
Credit rating agency Fitch Ratings says ₹5.6 trillion liquidity infusions and cash reserve ratio cut will support loan growth, though banks may see short-term pressure on margins
Banks park only ₹57,450 crore in RBI's ₹1-trillion three-day VRRR as they conserve liquidity ahead of GST payments and fortnightly reporting requirements
Nomura reports that the RBI may shift its liquidity management target from WACR to TREPS or a SORR-like composite, in line with global best practices and increased volumes in secured money markets
Excess liquidity could also incentivise the banking system to extend loans at lower rates
On 4th July, the Supreme Court refused to intervene in a plea filed by HDFC Bank CEO Sashidhar Jagdishan to quash an FIR against him on a complaint by Lilavati Trust.
While surplus liquidity influences overnight borrowing costs, a recent analysis by the firm showed it does not impact credit or deposit growth in the economy