Desperate Banks Bid Rs 2.73 Tn In VRR Auction
Friday's seven-day variable rate repo (VRR) auction drew substantial attention, with banks tendering bids worth Rs 2.73 trillion, surpassing the notified amount of Rs 1 trillion. This auction, the first in six months, aims to alleviate liquidity strain triggered by recent bank outflows due to advance tax and GST payments.
A dealer at a private bank informed a media house that the high volume of bids underscores banks' urgent need for funds, highlighting the severity of the liquidity crunch within the system.
However, this liquidity crunch appears transient as government cash reserves held with the Reserve Bank of India (RBI) remain high. Anticipated government spending is expected to ameliorate liquidity strains. Additionally, robust foreign inflows into the equity markets in recent months further hint at improving liquidity.
As of 14 December, RBI data indicated a liquidity deficit of Rs 44,285 crore.
The RBI accepted bids at a 6.61 per cent cut-off rate, lower than the marginal standing facility (MSF) rate of 6.75 per cent. The MSF serves as an avenue for banks to access overnight liquidity when interbank liquidity diminishes.
The previous VRR auction, orchestrated by the central bank, occurred on 19 June.
In banking, a repo auction infuses liquidity into the system, whereas a reverse repo auction absorbs excess liquidity. Since September, liquidity has transitioned into a deficit, leading banks to heavily borrow from the marginal standing facility to meet funding requirements.
Banks' reliance on MSF reached a record high of Rs 2.34 trillion on 22 November. During September, average MSF borrowing amounted to nearly Rs 0.95 trillion, escalating to Rs 1.2 trillion in October-November 2023. Funds parked under the Standing Deposit Facility (SDF) averaged at Rs 0.62 trillion and Rs 0.58 trillion in October and November, respectively.
