The Reserve Bank of India (RBI) got a tepid response from Banks to the 14-day variable rate reverse repo (VRRR) auction it conducted on Friday even as liquidity in the banking system turned surplus after remaining in deficit for three days beginning August 21.

The central bank received offers aggregating ₹22,419 crore against the notified amount of ₹ one lakh crore at the VRRR auction. It accepted these offers at the cut-off rate of 6.49 per cent.

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At the previous VRRR auction on August 11, RBI had received offers aggregating ₹34,139 crore against the notified amount of ₹ one lakh crore. It accepted these offers at the cut-off rate of 6.49 per cent.

Though the overall liquidity in the banking system moved into surplus (₹25,833.57 crore) mode as on August 24, some banks borrowed ₹50,113 crore from the marginal standing facility (MSF) window, indicating uneven distribution of liquidity.

Overall banking system moved into surplus liquidity mode on August 24 after being in deficit on three consecutive days beginning August 21.

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Tight liquidity

There is tightness in liquidity in the banking system as RBI asked banks to temporarily maintain incremental cash reserve ratio (I-CRR), GST payments and robust credit demand.

I-CRR of 10 per cent on the increase in banks’ deposits between May 19 and July 28 was prescribed as a temporary measure with effect from the fortnight beginning August 12 to neutralise the effect of return of ₹2000 banknotes to the banking system, RBI’s surplus transfer to the government, pick up in government spending and capital inflows. 

The tightness in liquidity is getting reflected in overnight money market rates, which have moved beyond the marginal standing facility (MSF) rate of 6.75 per cent. The weighted average rate in the money market was 6.76 per cent on Friday.

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In his bi-monthly monetary policy statement on August 10, RBI Governor Shaktikanta Das noted that despite such surplus liquidity, market response to RBI’s 14-day VRRR auctions was lukewarm; instead, banks preferred to place their surplus liquidity in the less remunerative standing deposit facility (SDF).

Although the fine-tuning VRRR auctions of one to four days maturity during this period evoked better response from the market, this essentially reflects greater risk aversion among banks to park large funds under the main operation, he added.

The Governor emphasised that fine-tuning operations (overnight and up to 13 days) are undertaken to deal with special or exceptional situations and cannot become the rule.