RBI absorbs Rs 6.13 lakh crore as banks shun longer lock-in

New Delhi: The Reserve Bank of India (RBI) absorbed Rs 6.13 lakh crore of surplus liquidity from the banking system through two variable rate reverse repo (VRRR) auctions on Monday, although banks showed limited appetite for parking funds for a longer period.

The central bank had initially sought to withdraw Rs 7 lakh crore through a 30-day VRRR auction. However, banks offered only Rs 2,59,276 crore—just over 37 percent of the notified amount—despite being allowed to seek premature withdrawal of their deposits.

Follow The PSUWatch Channel on WhatsApp

The RBI accepted all the bids received at a cut-off and weighted average rate of 5.24 percent, one basis point below the prevailing repo rate of 5.25 percent.

Following the weak response to the longer-tenure operation, the RBI announced an overnight VRRR auction of Rs 5 lakh crore. Banks submitted bids worth Rs 3,53,390 crore, or more than 70 percent of the notified amount, and the central bank accepted the entire sum at 5.24 percent.

The contrasting subscription levels indicate that banks were more willing to park excess cash overnight than commit it for 30 days. Taken together, the two auctions attracted about 51 percent of the combined notified amount of Rs 12 lakh crore.

A VRRR auction is used by the RBI to temporarily withdraw surplus money from banks. The liquidity returns to the banking system when the operation matures. Such auctions also help prevent excessive cash from pushing overnight money-market rates substantially below the central bank’s policy rate.

Banking-system liquidity was estimated to be in surplus of more than Rs 11 lakh crore as of September 6, following large foreign-currency inflows mobilised under the RBI’s special deposit and borrowing facilities.

The measures brought in USD 136.38 billion by August 31, comprising USD 127.23 billion through Foreign Currency Non-Resident (Bank), or FCNR(B), deposits, USD 5.26 billion through overseas foreign currency borrowings and USD 3.89 billion through external commercial borrowings.

Follow PSU Watch on LinkedIN

Banks subsequently exchanged much of the foreign currency with the RBI, receiving rupees in return and adding substantially to domestic liquidity.

The FCNR(B) mobilisation window was closed a month ahead of schedule on August 31 after attracting a stronger-than-expected response. The facilities covering external commercial borrowings and overseas foreign currency borrowings, however, are scheduled to remain available until December 31.

The scale of the surplus has forced the RBI to intensify liquidity-absorption operations. Its recent VRRR auctions have ranged from overnight to 15 days, with Monday’s operation representing a shift towards a substantially longer 30-day tenor. The poor subscription to that auction, despite the early-exit option, underlines the central bank’s challenge in withdrawing surplus funds for longer periods without restricting banks’ access to liquidity.

(PSU Watch is India's Business News centre that places the spotlight on PSUs, Bureaucracy, Defence and Public Policy. 👉 Click to join our channel now: PSUWatch WhatsApp Channel. Prefer LinkedIn? Follow PSU Watch on LinkedIN. Click to stay connected on Twitter here and stay updated)