Several Indian banks have urged the Reserve Bank of India (RBI) to continue with more overnight variable rate reverse repo auctions, despite the first attempt seeing subscriptions of less than half the target amount of 1 trillion rupees. The RBI’s overnight variable rate reverse repo, or VRRR, is usually used to withdraw excess liquidity from the system. However, subscriptions to the first auction amounted to only 390 billion rupees. Despite this, banking officials believe the auctions should continue as a way to absorb additional money from the system.
According to a senior treasury official at a private bank, a significant portion of the surplus was already parked with the RBI, which led to the low subscription rate for the overnight auction. The RBI has been conducting shorter duration two-day VRRRs in recent weeks. However, prompted by lenders, it decided to resort to an overnight auction.
Banks have already parked 878 billion rupees in two-day VRRR and 118 billion rupees under 14-day VRRR. The lower participation in the overnight auction could be due to banks being cautious before tax outflows. Mataprasad Pandey, vice president at financial advisory firm Arete Capital, believes that overnight VRRR auctions should receive healthy responses if they do not coincide with any major cash outflows.
The banking system liquidity surplus rose to 2.35 trillion rupees on Wednesday, the highest in a month. This led to a sharp decrease in overnight rates, which are currently averaging below the RBI’s repo rate of 6.50%. The RBI has been actively conducting reverse repos to maintain overnight rates around the repo rate. In a statement in June, RBI Governor Shaktikanta Das mentioned the central bank’s intention to align overnight call rates to 6.5%.
A treasury head at a state-run bank remarked that the best way to push overnight rates higher is to continue with overnight VRRRs. Otherwise, banks may prefer to park money at the standing deposit facility instead of opting for longer-term reverse repos. In June, Reuters reported that the central bank could resort to overnight VRRRs due to banks’ reluctance to park funds for longer periods.
Overall, several Indian banks believe that the RBI should continue with more overnight variable rate reverse repo auctions, despite the low subscriptions in the first attempt. The liquidity surplus in the banking system has reached 2.35 trillion rupees, leading to a decrease in overnight rates below the repo rate. The RBI has been proactive in conducting reverse repos to bring the overnight rates in line with the repo rate.
