Surplus liquidity in the country's banking system has once again grabbed everyone's attention. On Thursday, this amount rose to ₹4.04 lakh crore, the highest level in the last two years. This is the first time since May 19, 2022, that such a high level of surplus liquidity has been recorded in the banking system.
This level of liquidity not only impacts monetary policy but also affects overnight rates, i.e., the rates for transactions between banks for a one-day period. Considering this, the Reserve Bank of India (RBI) has become fully alert.
RBI Receives Tremendous Response in VRRR Auction
The Reserve Bank conducted a seven-day Variable Rate Reverse Repo (VRRR) auction on Thursday, in which it received bids of ₹1.70 lakh crore against a notified amount of ₹1 lakh crore. The RBI accepted ₹1 lakh crore at a cut-off rate of 5.47 percent.
These auctions are conducted to withdraw surplus liquidity from the banking system and bring the overnight rate closer to the repo rate.
More Interest Compared to Previous Auction
Notably, the last time the RBI conducted a similar auction, it received bids of only ₹84,975 crore, while the notified amount was ₹1 lakh crore then as well. Experts say that the previous auction took place around the end of the quarter, when the cash position of banks is slightly different.
Now that the government has made heavy expenditures and the availability of cash in the market has increased, banks have more money which they want to park with the RBI.
Government Spending Leads to Cash Flood
In May, the central government received a dividend of ₹2.69 lakh crore from the RBI. After this, the government made large-scale expenditures, which flooded the market with cash. Additionally, GST collections were slightly lower than expected, leading to a slight decrease in government deposits and the money coming into the banks.
These two factors together rapidly increased the amount of surplus liquidity in the banking system.
Impact on WACR and TREP Rates
The RBI intends to keep the overnight Weighted Average Call Rate (WACR) close to the repo rate. Currently, the repo rate is 5.50 percent, while the WACR has reached 5.29 percent. On Thursday, this rate increased slightly from the previous 5.26 percent. Meanwhile, the overnight TREP rate was recorded at 5.18 percent, which was 5.12 percent earlier.
This situation is an indication to the RBI that further steps can be taken to control liquidity.
Will RBI Now Conduct VRRR Auctions Every Day?
The market's eyes are now fixed on what steps the RBI will take next. Some traders and banking analysts believe that if surplus liquidity remains the same, the RBI may have to conduct VRRR auctions daily and also increase the notified amount.
This will impact overnight rates and help in keeping them around the repo rate.
Liquidity Position in the Near Future
VRC Reddy, Treasury Head of Karur Vysya Bank, says that the current situation of abundant liquidity may persist and the surplus liquidity may remain above ₹4 lakh crore in the near term. He also said that the liquidity position changes at the end of the quarter, but this time the liquidity situation is much better than before.
Market Eyes on RBI's Next Move
The market is now watching how aggressively the Reserve Bank makes the VRRR auctions going forward. If the RBI conducts auctions every day and also increases its amount, it will signal that it is serious about keeping the overnight rate close to the repo rate.
