Banks parked Rs 5,995 cr in 14-day VRRR despite huge liquidity deficit

According to the auction results, banks parked the funds at a 6.49 percent cut-off rate and weighted average rate

Banks on September 22 parked Rs 5,995 crore in the 14-day variable rate reverse repo auction (VRRR) despite a huge deficit of liquidity in the banking system. Dealers attributed the deposit behind some banks having surplus funds and parking the same.

“There is never a situation when no bank has surplus to park hence I was expecting a muted response but not zero,” said Mataprasad Pandey, Vice President of Arete Capital Service.

According to the auction results, banks parked the funds at a 6.49 percent cut-off rate and weighted average rate. The central bank has notified Rs 50,000 crore amount in 14-day VRRR.

Currently, the liquidity in the banking system is estimated to be in deficit of around Rs 1.49 lakh crore. Due to this, banks have increased their borrowings through the marginal standing facility (MSF) and it touched a record high on September 18 and again on September 21.

According to the money market operations of the RBI, banks borrowed Rs 1.99 lakh crore as of September 21, which is the highest since the inception of the MSF corridor by the RBI in 2011-12. Prior to this, the record high borrowing via the MSF route was on September 18 worth Rs 1.97 lakh crore.

Liquidity in the banking system has been tight in the days since the RBI announced the incremental cash reserve ratio (I-CRR) in August. I-CRR was introduced with the aim of removing surplus liquidity overhang in the system, which was caused due to the withdrawal of currency notes of Rs 2,000 denomination from circulation.

As on September 1, the RBI said that Rs 3.32 lakh crore worth of Rs 2,000 banknotes (93 percent of the notes in circulation) had returned to the banking system. Of the total notes received, about 87 percent were in the form of deposits and the remaining 13 percent were exchanged with lower denomination bills of lower denomination.