The Reserve Bank of India (RBI) conducted a variable rate reverse repo (VRRR) auction on Friday, but banks remained reluctant to park funds with the central bank. This is because banks are expecting over Rs 2 trillion outflows this month, due to advance tax payments and Goods and Services Tax (GST) payments.
The RBI had notified a VRRR auction of Rs 1 trillion for the four-day VRRR auction, but banks parked only Rs 5,780 crore. This is a tepid response to the VRRR auction, and it indicates that banks are worried about liquidity tightness.
The head of treasury of a public sector bank said that banks are "playing it safe" ahead of the advance tax and GST outflows. The central bank has mopped up over Rs 1.5 trillion through VRRR auctions this month, but banks are still cautious about parking funds with the RBI.
There is still some amount of liquidity in the system, but banks are expecting a sharp outflow of funds this month. This could lead to liquidity tightness, and it could put pressure on short-term interest rates.
The RBI is likely to take steps to ensure that liquidity does not tighten too much. The central bank could conduct more VRRR auctions, or it could buy government securities in the open market. The RBI is also likely to keep the repo rate unchanged at its next policy review meeting on June 22.
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