Banks were hesitant to participate in the Reserve Bank of India (RBI’s) two-day variable rate reverse repo (VRRR) auction on Tuesday as they parked Rs. 67,295 crore against the notified amount of Rs. 1 trillion at a weighted average rate of 6.49 per cent.
According to bankers, there are other investment avenues that fetch them higher returns than 6.49 per cent that the RBI offers.
“Banks are not sitting on cash, because deposit growth is not that much as compared to advance growth, and whatever liquid money we have, we’ll invest in T-bills (Treasury bills) or CDs (certificates of deposits), and CPs (commercial papers),” a dealer at a state-owned bank said.
“There we will be getting 30-40 basis points more than what we are getting in VRRR. We can even invest in four-day or five-day T-bills, where we will get 6.50-6.55 per cent return.”
Overall, banks have demonstrated a clear inclination to conserve liquidity by deploying funds significantly lower than the notified amount during the VRRR auctions so far. While the RBI’s monetary policy stance remains as “withdrawal of accommodation”, banks are cautious about potential liquidity mismatches, leading them to hold back on deploying funds in these auctions.
“We can’t borrow from the market and invest in VRRR, because the overnight rates might move up anytime, we can even see the overnight rates to move up to 6.60-6.70 per cent tomorrow (Wednesday), as compared to 6.25-6.30 per cent today (Tuesday), depending on the liquidity,” a dealer at another state-owned bank said.
“We used to borrow from the market and participate in these auctions during the pandemic, because we used to get the arbitrage, in the secondary market. The TREPS (Tri-party repo) were 50-60 basis points less than what the RBI used to take in reverse repo (VRRR), and we cannot take that bet now,” the dealer said.
Liquidity in the banking system continued to stay in the surplus mode as the latest data showed banks have parked almost Rs. 2.2 trillion with the RBI on Monday.
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