The Reserve Bank of India on Monday mopped up over Rs 6 lakh crore of excess funds from the banking system in two auctions, which saw an underwhelming response from banks despite surplus liquidity.
Banks show muted interest in 30-day VRRR
The 30-day variable rate reverse repo (VRRR) auction announced last week received a tepid response from banks, and the central bank announced another auction in the first half of the day.
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 VRRR, according to an official statement.
The bids for the 30-day VRRR were accepted at the cut-off and weighted average rate of 5.24 per cent, according to the RBI.
Overnight auction draws stronger response
Soon afterwards, the RBI announced an overnight VRRR auction with a notified amount of Rs 5 lakh crore, which was completed at 1130 hrs.
Market response to the second auction was a tad better, with bids of Rs 3,53,390 crore received, which amounts to over 70 per cent of the notified amount, indicating that lenders are comfortable parking funds for a shorter tenure.
For the overnight, the RBI accepted the full amount at a cut-off rate and weighted average rate of 5.24 per cent.
RBI steps up liquidity absorption
A VRRR auction is a monetary policy tool used by a central bank to absorb excess cash from the banking system.
Liquidity in the banking system was estimated to be in surplus of around Rs 11.16 lakh crore as on September 6.
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.
FCNR(B) inflows add to banking liquidity
The RBI's special forex measures mobilised USD 136.38 billion by August 31, including USD 127.23 billion through FCNR(B) deposits, USD 5.26 billion through OFCBs, and USD 3.89 billion through ECBs, according to RBI data.
The FCNR(B) window was closed a month early on August 31 due to the strong response, while the ECB/OFCB facility remains open till December 31 and inflows through these routes are expected to pick up.
The mobilisation brought foreign currency into the banking system, while subsequent swaps with the RBI provided banks with rupee liquidity.
To align with the repo rate, the central bank has conducted 32 VRRR auctions between August and so far in September, with maturities ranging from overnight to 14 days.