RBI bid to drain surplus liquidity and improve rate transmission sees muted response
Banks parked just Rs 79,655 crore in the central bank’s 29-day variable rate reverse repo (VRRR) auction, less than half the Rs 2 lakh crore absorption planned in the offer. Draining liquidity is considered crucial for quicker and effective transmission of increases in policy rates.
The Reserve Bank of India's attempt to reduce surplus liquidity and enhance the impact of its first rate hike in nearly four years on Thursday did not yield a strong response.The central bank expected banks to deposit Rs 2 lakh crore in its 29-day variable rate reverse repo (VRRR) auction, but received just Rs 79,655 crore.Banks were allowed to withdraw funds with a two-day notice, which may have contributed to the low participation.The RBI aimed to use various liquidity-management tools to facilitate the transmission of the rate increase.However, some banks opted not to participate in the longer-term VRRR due to the availability of the daily VRRR option.The RBI absorbed Rs 1.61 lakh crore through the daily VRRR, which falls short of the planned Rs 2 lakh crore.The central bank expects surplus liquidity to drain by the end of the fiscal year and expects robust credit off-take, aided by the festive season.Eventually, the inter-bank market held Rs 4.24 lakh crore of surplus liquidity at the end of October 7.
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