The Reserve Bank of India (RBI) sucked out Rs 6.02 lakh crore from the banking system through variable-rate reverse repo (VRRR) auctions on Friday. It stepped up its liquidity absorption operations, as surplus funds hit a fresh record and overnight rates remained well below the policy rate.
Banking-system liquidity stood at an all-time-high surplus of Rs 10.3 lakh crore as of Thursday, setting a record for the second straight day. The surplus has averaged Rs 7.05 lakh crore over the past week, nearly double the Rs 3.67 lakh crore average in August and more than six times the Rs 1.07 lakh crore recorded in July, RBI data showed.
Faced with the liquidity deluge, the central bank has sharply increased its absorption operations. On Friday, it conducted two three-day VRRR auctions with notified amounts of Rs 7 lakh crore and Rs 1.5 lakh crore, attracting bids worth Rs 5.4 lakh crore and Rs 60,419 crore, respectively. The auction was conducted at a cut-off rate of 5.24%.
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Over the week, the RBI conducted overnight and term VRRR auctions with a combined notified amount of Rs 41 lakh crore, against which banks offered Rs 23.74 lakh crore.
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“The liquidity surplus is likely to touch Rs 12 lakh crore before easing once tax outflows kick in. The RBI will mostly manage this through VRRRs as of now. Banks typically prefer overnight auctions since they do not want to lock up funds for longer tenors,” said a dealer at a state-owned bank.
Widening Surplus
The sheer scale of the surplus, however, is making it increasingly difficult for the RBI to keep overnight rates anchored to its policy rate.
The weighted average call rate (WACR), the RBI’s operating target for monetary policy, eased to 4.94% on Friday from 4.95% in the previous session, remaining significantly below the 5.25% repo rate. Collateralised overnight rates have fallen even further, into the 4-4.5% range.
Market participants said persistent surplus liquidity could force the RBI to look beyond short-term VRRR auctions, with forex swaps and an incremental cash reserve ratio (I-CRR) among the possible tools.
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“Even though RBI is trying to mop up the excess via short-term VRRRs, this is not fully effective. Further, collateralised overnight rates have slid to the 4-4.5% area and short-term money market instruments are being dragged to sub-6% yields,” Suyash Choudhary, CIO-fixed income at Bandhan AMC, said in a note.
He said “urgent attention” was required, with substantial measures needed to sustainably re-anchor overnight rates to the policy rate.
Choudhary expects core liquidity to remain above 2% of net demand and time liabilities (NDTL) even by the end of March. “Thus, the RBI may have to deploy a combination of temporary and more permanent measures for liquidity absorption, and sooner rather than later,” he said.
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This article was first uploaded on September four, twenty twenty-six, at twenty-seven minutes past eight in the night.
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