RBI's ₹7 Lakh Crore VRRR Auction Sees Low Bank Participation

The Reserve Bank of India's (RBI) 30-day variable rate reverse repo (VRRR) auction received a muted response from banks, with bids totaling ₹2,59,276 crore, significantly short of the notified amount of ₹7 lakh crore. The auction was held to absorb excess liquidity from the banking system, which is currently estimated to be in surplus of around ₹10.73 lakh crore.

The RBI has been using VRRR auctions as a monetary policy tool to manage liquidity in the system. Despite the surplus liquidity, banks' participation in the auction was low, with the cut-off and weighted average rate being 5.24 percent.

The central bank has stepped up liquidity absorption operations due to large inflows through the special FCNR(B) deposit scheme. The scheme, which was closed a month early on August 31, mobilized $136.38 billion, including $127.23 billion through FCNR(B) deposits. The subsequent swaps with the RBI provided rupee liquidity to banks, adding to the surplus.

To align with the repo rate, the RBI has conducted 32 VRRR auctions between August and September, with maturities ranging between overnight and 14 days. The central bank also announced an overnight VRRR auction for a notified amount of ₹5 lakh crore on Monday.

The low participation in the VRRR auction may be due to the fact that banks are already holding excess liquidity and may not see the need to park their funds with the RBI at the current rates. The RBI's efforts to absorb excess liquidity are aimed at preventing excessive money supply from fueling inflation.

The banking system's surplus liquidity is expected to continue, with inflows through the ECB/OFCB facility expected to pick up. The RBI will likely continue to use VRRR auctions to manage liquidity and maintain monetary stability.

The RBI's actions are significant for the Indian economy, as they aim to balance the need to control inflation with the need to support economic growth. The central bank's decisions on liquidity management will be closely watched by markets and economists in the coming months.

In conclusion, the RBI's VRRR auction saw low participation from banks, despite the surplus liquidity in the system. The central bank's efforts to absorb excess liquidity will continue, with a focus on maintaining monetary stability and supporting economic growth.