The Reserve Bank of India conducted two VRRR auctions to drain excess cash from the banking system. While the overnight auction saw healthy participation, the 30-day window faced a lukewarm response from lenders.

  • RBI absorbed over ₹6 lakh crore in excess funds through two Variable Rate Reverse Repo (VRRR) auctions.
  • The 30-day VRRR auction received a tepid response, securing only ₹2.59 lakh crore against a ₹7 lakh crore target.
  • The overnight auction performed better, with bids reaching over 70% of the notified amount.

The Reserve Bank of India (RBI) on Monday executed a massive liquidity absorption exercise, mopping up over ₹6 lakh crore from the banking system. This operation comes at a time when the Indian banking sector is grappling with a significant surplus of funds, estimated at approximately ₹11.16 lakh crore as of September 6.

The first phase of the operation, a 30-day Variable Rate Reverse Repo (VRRR) auction, encountered a surprisingly cold reception. Despite the central bank notifying an amount of ₹7 lakh crore, banks submitted bids for just over ₹2.59 lakh crore. The bids were accepted at a cut-off and weighted average rate of 5.24%. This disparity suggests a cautious approach among banks regarding locking in liquidity for a month.

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Recognizing the underwhelming response to the longer tenure, the RBI swiftly launched an overnight VRRR auction with a notified amount of ₹5 lakh crore. This second attempt yielded more favorable results, with bids totaling ₹3,53,390 crore. This represents over 70% of the notified amount, indicating that commercial lenders are far more comfortable parking their surplus funds for the shortest possible duration.

Why This Matters

BozokMedia analysis shows that the divergence in auction responses reveals a strategic hesitation among banks. While there is an abundance of cash, the preference for overnight deposits over 30-day commitments suggests that banks are maintaining high agility to respond to immediate credit demands or potential market volatility.

The use of VRRR auctions allows the RBI to fine-tune liquidity without making abrupt changes to the benchmark repo rate.

The root cause of this liquidity surge is linked to the special FCNR(B) deposit scheme. According to RBI data, special forex measures mobilized $136.38 billion by August 31, with $127.23 billion coming through FCNR(B) deposits alone. The subsequent swaps of these foreign currency deposits with the RBI provided banks with a massive influx of rupee liquidity.

Historically, the RBI has utilized a variety of tools to manage the money supply. Between August and September, the central bank has conducted 32 VRRR auctions with maturities ranging from overnight to 14 days to ensure that the system remains aligned with the current repo rate.

Auction Type Notified Amount Bids Received Response Level
30-Day VRRR ₹7 Lakh Crore ₹2.59 Lakh Crore Tepid
Overnight VRRR ₹5 Lakh Crore ₹3.53 Lakh Crore Positive
Did You Know?: A Variable Rate Reverse Repo (VRRR) is essentially a tool where the RBI borrows money from banks at a variable interest rate to reduce the money circulating in the economy.

Frequently Asked Questions

1. What is a VRRR auction?
It is a monetary policy tool used by the central bank to absorb excess liquidity from the banking system to control inflation.

2. Why was there a surplus of liquidity in the system?
The surplus was primarily driven by massive inflows through the special FCNR(B) deposit scheme and subsequent rupee swaps with the RBI.