Banks borrow lowest funds via daily VRR auctions on March 4 since inception of instrument

Reserve Bank of India

Indian banks have borrowed lowest funds through daily variable rate repo (VRR) auction since the Reserve Bank of India (RBI) has started it in January this year.

According to the RBI data, banks borrowed Rs 5,855 crore through daily VRR auction on March 4, from the notified amount of Rs 25,000 crore at cut-off rate of 6.26 percent.

The central bank had announced the daily VRR operations on January 16 to address the liquidity concerns of the banking system, along with other VRR auctions, open market operation (OMO) purchases, and USD/INR Buy/Sell swap auction.

However, despite today’s borrowing by banks was lowest, but the banks have borrowed less amount at 21 auctions than notified amount, out of total 31 auctions.

“With the banking system receiving $10 billion today ,marking the settlement date for the long-term USD/INR Swap auction ,we could observe a notable improvement ,resulting in reduced VRR borrowing that is around 77 percent lower than the notified amount,” said Mataprasad Pandey, vice-president of Arete Capital Service.

In the last one week, banking system liquidity deficit has narrowed from Rs 2.38 lakh crore as on February 22, to Rs 1.1 lakh crore as on March 3, as per RBI data.

Experts attributed this narrowing of deficit liquidity to the government month end spending towards salaries and pensions.

Kotak Mahindra Bank report dated March 3 said that liquidity conditions, while remaining in deficit, eased as compared to the prior week, supported by month-end government spending despite CRR product buildup.

Report further said that going into this week (March 1 to March 7), we expect banking system liquidity deficit to continue easing as the pace of government spending holds up towards the end of the year, and the impact of the 3-year US$10 bn buy/sell swap announced by the RBI.

Liquidity in the banking system has been under stress since November last year, due to tax outflows, heavy selling by foreign portfolio investors in Indian equities and the consequent intervention by the RBI in the forex market to sell dollars, and lower-than-anticipated government spending.

To support the system the RBI has since late 2024, infused around Rs 3 lakh crore worth of durable liquidity, tapping a combination of VRR auctions, swaps, and open market operations.