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Market participants said that due to scheduled outflows from the banking system on account of advance tax payments and goods and services tax, the surplus in the system liquidity narrowed.
Illustration: Uttam Ghosh
Key Points
- When there was surplus liquidity, almost everything was getting parked into the SDF.
- The VRR auction’s cut-off rate was set at 5.26 per cent.
- VRR auctions allow banks to borrow funds from the RBI against government securities at market-determined rates.
The net liquidity surplus in the banking system fell to Rs 16,875 crore on Thursday the latest data by the Reserve Bank of India (RBI) showed, lowest since 22 January.
Even when there was tepid demand in Friday’s three day variable rate repo auction, the central bank announced another such overnight auction on Monday (23 March) for a notified amount of Rs 1 trillion.
The weighted average call rate settled at 5.34 per cent on Friday, against the previous close of 5.29 per cent.
What market participants say
Market participants said that due to scheduled outflows from the banking system on account of advance tax payments and goods and services tax, the surplus in the system liquidity narrowed.
“When there was surplus liquidity, almost everything was getting parked into the SDF (standing deposit facility).
“That indicated there was no immediate use for funds,” said a treasury head at a private bank.
“The advance tax outflow funds is expected to return to the system as government spending towards the end of the month.
“As a result, participants are currently taking only as much liquidity as required for day-to-day operations.
“There is no additional bidding in VRR,” the person added.
RBI’s VRR auction
The RBI’s three-day variable rate repo (VRR) auction on Friday saw muted demand as large banks did not participate in the auction.
In addition, banks have been borrowing from the tri-party repo market, where the weighted average rate hovered around 5.05 per cent.
The VRR auction’s cut-off rate was set at 5.26 per cent.
The central bank received bids worth Rs 25,101 crore, against the notified amount of Rs 75,000 crore.
“Towards the end of the month, liquidity surplus is expected to widen due to government spending hence the demand for funds is relatively low.
“Plus, TREPS is better avenue for them to borrow funds at lower rates,” said a money market dealer at a state-owned bank.
VRR auctions allow banks to borrow funds from the RBI against government securities at market-determined rates, helping the central bank manage short-term liquidity in the financial system.
