VRR: Banks Park Less than Notified Sum

VRR: Banks Park Less than Notified Sum

Sub: Economy

Sec: Monetary Policy

Key Highlights:

• Surplus Liquidity Absorption: The Reserve Bank of India (RBI) has observed that banks have parked significantly less than the notified amount for three consecutive days since the beginning of July.
• Implication: This indicates that while the RBI is attempting to absorb surplus liquidity from the banking system in line with its “withdrawal of accommodation” monetary policy stance, banks do not have a significant surplus to park.

Auction Details:

1. Two-Day VRRR Auction (₹50,000 crore) – July 3, 2024:
   • Funds Deployed by Banks: ₹25,145 crore
   • Weighted Average Rate (WAR):49%
2. Three-Day VRRR Auction (₹75,000 crore) – July 2, 2024:
   • Funds Deployed by Banks: ₹38,227 crore
   • WAR:49%
3. Four-Day VRRR Auction (₹75,000 crore) – July 1, 2024:
   • Funds Deployed by Banks: ₹4,200 crore
   • WAR:49%

Analysis:

• Liquidity and Monetary Policy: The overall system liquidity remains somewhat positive due to ongoing government spending.
• Monetary Policy Objective: The RBI’s VRRR auctions aim to maintain the weighted average call rate (WACR) at or above 6.50%, aligning with its monetary policy stance.

Conclusion:

The recent VRRR auction results reflect a lower-than-notified participation by banks, suggesting limited surplus liquidity in the banking system. Despite the RBI’s efforts to absorb excess liquidity, the banks’ responses indicate a cautious approach, influenced by the current economic and monetary policy environment.

Variable Repo Rate:

• Variable Repo Rate allows banks to borrow funds from RBI at rates determined through auctions, which may vary but typically remain above the Reverse Repo Rate.
• Example: If RBI conducts a Variable Repo auction and the prevailing market rates are lower than the standard Repo Rate (6.5%), banks may bid to borrow funds from RBI at rates slightly above the Reverse Repo Rate (e.g., 3.5%). This allows banks to access liquidity at competitive rates for short-term needs.
• Purpose: Variable Repo Rate supports RBI’s efforts to manage liquidity by providing banks with an alternative to the standard Repo operations. It ensures that banks can access funds at rates reflective of market conditions, facilitating smoother liquidity management in the banking system.

Variable Reverse Repo Rate (VRRR):

• VRRR allows RBI to conduct auctions where banks bid to deposit excess funds at rates determined by market demand, rather than a fixed rate set by RBI.
• Example: During a VRRR auction, banks bid to deposit funds with the RBI for a specified duration (e.g., 14 days). If market conditions suggest higher rates, banks may bid higher than the standard Reverse Repo Rate to earn a better return on their excess funds.
• Purpose: VRRR provides flexibility for RBI to manage liquidity effectively, especially when market rates differ significantly from the fixed Reverse Repo Rate. It ensures that RBI can absorb liquidity at rates aligned with prevailing market conditions, thereby enhancing the effectiveness of monetary policy operations