Liquidity-Strapped Banks Bid Rs 4.25 Tn In VRR Auction
The recent seven-day variable rate repo (VRR) auction conducted by the Reserve Bank of India (RBI) received significant interest from banks, with bids amounting to Rs 4.25 trillion, surpassing the notified Rs 1.75 trillion by 2.5 times.
The substantial bids from banks underscore the acute cash crunch within the system, as the liquidity deficit in the banking system reached nearly an 8-year peak of Rs 2.58 trillion, prompting the RBI to organise this second VRR auction in December.
Madan Sabnavis, Bank of Baroda's chief economist, highlighted that the RBI appears content with this liquidity tightness, evident in the consecutive 7-day auctions offering temporary relief to banks facing liquidity shortages. This aligns with the central bank's strategy of scaling back accommodation in line with the current conditions.
Anticipating persistent tight liquidity, Sabnavis foresees another VRR auction by the central bank in the following week. Liquidity constraints persist due to outflows toward advance tax payments and the GST.
To address the liquidity squeeze, an earlier VRR auction on 15 December aimed at injecting Rs 1 trillion encountered bids worth Rs 2.73 trillion, indicating the ongoing high demand for liquidity.
The overnight money market rates have risen due to the tight liquidity, with the inter-bank call money's weighted average rate reaching 6.80 per cent on Thursday.
Experts predict this liquidity crunch to continue in December, with potential improvements expected in January coinciding with increased government spending.
Market observers closely monitor the size of upcoming VRR auctions as it indicates the liquidity trend. A reduced auction size may suggest the RBI's anticipation of some liquidity ease.
Credit demand surpassing deposit growth has caused banks to hesitate in raising deposit rates, with expectations of interest rate moderation in the first half of the upcoming year.
