KOCHI: Banks barely tapped into the Reserve Bank of India’s Rs50,000 crore overnight liquidity window on July 24, with bids totalling just Rs1,421 crore or 2.8 per cent of the offer.
The sharply subdued demand points to continued surplus liquidity in the banking system and a lack of immediate funding pressure.
The overnight Variable Rate Repo (VRR) auction, which offers banks short-term funds against government securities, is part of the RBI’s liquidity management toolkit.
Despite the central bank keeping the auction size large, the actual drawdown by banks has been consistently low in recent weeks, reinforcing the view that banks are well-funded and not facing short-term mismatches.
Thursday’s auction saw one of the lowest uptakes in recent history, according to bond dealers, suggesting that surplus liquidity – currently estimated at over Rs2.5 lakh crore _- continues to dominate the system.
The cut-off rate was 5.51 per cent, while the weighted average rate came in at 5.53 per cent, both within the expected range and close to the prevailing repo rate.
The RBI had paused the daily VRR auctions from June 11 due to low participation, but reintroduced them earlier this month in anticipation of volatility or sudden shifts in liquidity. However, the tepid interest suggests those concerns haven’t materialised.
The question then arises: why does the RBI continue offering such large amounts when uptake is negligible?
Policy observers say the central bank is simply keeping its options open.
Large offer signals stability
Having a large liquidity window signals stability to the market and ensures that banks know funds are available if needed, especially in a macro environment where forex volatility, government cash balances, or monsoon uncertainties could suddenly alter the liquidity picture.
For now, though, the picture is one of calm. Banks are flush with deposits, credit offtake is not rising sharply, and the overall system doesn’t need overnight borrowing in any significant measure.
Some bankers also point out that the sharp contrast between last year’s liquidity crunch — when banks were aggressively bidding in VRRs – and the current situation highlights how quickly the system can swing from tightness to surplus.
The lack of demand also reduces the need for short-term interbank borrowing, keeping overnight rates stable. This adds to the RBI’s comfort that monetary policy transmission is not being disrupted by liquidity mismatches.
With only Rs1,421 crore taken out of a Rs50,000 crore window, Thursday’s result could go down as one of the quietest liquidity days in the RBI’s recent repo operations – a signal that, at least for now, the financial system is sitting comfortably, even if the central bank keeps its liquidity firehose ready.
