RBI absorbs Rs 6 lakh crore as banking system flush with funds

Mumbai: The Reserve Bank of India (RBI) on Monday mopped up over Rs 6 lakh crore of surplus liquidity from the banking system through two variable rate reverse repo (VRRR) auctions, though banks showed a mixed response to the longer-tenure window.

The 30-day VRRR auction, with a notified amount of Rs 7 lakh crore, received bids worth only Rs 2.59 lakh crore. The RBI accepted the bids at a cut-off and weighted average rate of 5.24 per cent.

The central bank subsequently conducted an overnight VRRR auction for Rs 5 lakh crore. Banks bid Rs 3.53 lakh crore, or more than 70 per cent of the notified amount, signalling greater willingness to park surplus funds with the RBI for a shorter period. The entire amount was accepted at a cut-off and weighted average rate of 5.24 per cent.

A VRRR auction is used by the RBI to temporarily absorb excess funds from banks. The move helps keep short-term money-market rates aligned with the policy repo rate while preventing surplus liquidity from exerting undue downward pressure on market rates.

Liquidity in the banking system was estimated at around Rs 11.16 lakh crore in surplus as of September 6.

The liquidity glut has been amplified by strong inflows through the RBI's special foreign-exchange measures. These mobilised $136.38 billion by August 31, including $127.23 billion through FCNR(B) deposits. The FCNR(B) window was closed early following strong demand.

The RBI has conducted 32 VRRR auctions since August, with maturities ranging from overnight to 14 days, stepping up absorption as banks received additional rupee liquidity through forex-related operations.

ABOUT THE AUTHOR

The Hans India