Banks reluctant to park funds with RBI in long-term VRRR ahead of GST outflows

The GST outflows are expected to happen on July 20, which is monthly phenomena. As per market participants, the GST outflows could be between Rs 1.50 lakh crore and Rs 1.75 crore.

Banks have turned reluctant to park their funds with the Reserve Bank of India (RBI) for a longer tenure in the variable rate reverse repo auctions because, according to experts, the lenders want to maintain higher level of funds ahead of the goods and services tax (GST) outflow.

The GST outflows usually take place on the 20th day of every month. As per market participants, the GST outflows on July 20 could be between Rs 1.50 lakh crore and Rs 1.75 lakh crore.

“Banks avoid parking for more number of days in variable rate reverse repo (VRRR) auction due to the dynamic nature of liquidity. This 14-day VRRR also includes GST payment due date, that makes it even sensible for banks to be more cautious from the liquidity management point of view,” said Mataprasad Pandey, vice-president of Arete Capital Service.

The lenders are, however, not reluctant to park their funds in the shorter tenure VRRR auctions.

"Banks usually will not lock the funds if they are not sure of the liquidity position hence prefer to keep it for shorter periods that to with in the tenor of fortnight ending," said V. Ramachandra Reddy, Head Treasury, The Karur Vysya Bank.

Since the start of this month, the central bank had conducted 10 VRRR auctions, but subscription happened either 50 percent and in some cases 100 percent. All these auctions have been of shorter tenure ranging between overnight and four days.

The VRRR auction conducted by the RBI on July 12 received muted response from the banks. The notified amount in the auction was Rs 1 lakh crore, but banks only parked Rs 9,581 crore. The subscription was below 10 percent of the notified amount.

The central bank has been making constant efforts to remove liquidity from the banking system and this has been a phenomenon since last so many months.

Experts said that the central bank also wants to maintain the liquidity in deficit to align the overnight rate to the repo rate or slightly above it.

Maintaining liquidity under control will also help the central bank to maintain inflation under check, experts said. This is because larger surplus liquidity can lead to higher asset prices and could pose a risk to inflation numbers.

Liquidity in the banking system was in surplus of around Rs 93,870.72 crore on July 14, as per the RBI money market operations data.

Inflation numbers, which were on the downward trajectory, had hit a four-month high in June to 5.08 percent from 4.75 percent a month back as food inflation galloped to 9.4 percent, given the impact of heatwave on vegetables.