Banks Park Only Rs 79655 Crore in RBI 29-Day VRRR Auction Against Rs 2 Lakh Crore Target

The Reserve Bank of India's (RBI) major liquidity absorption exercise met with tepid interest from lenders on Thursday, as banks parked less than half of the notified amount in a 29-day Variable Rate Reverse Repo (VRRR) auction.

Against a notified target of Rs 2 lakh crore, the central bank received and accepted bids worth Rs 79,655 crore at a cut-off and weighted average rate of 5.49 percent. The muted turnout came even as banking system liquidity remained in deep surplus, estimated around Rs 4.24 lakh crore to nearly Rs 5 lakh crore.

Overnight Preference Over Long-Term Lock-In

In sharp contrast to the 29-day auction, lenders showed robust appetite for the RBI’s overnight window. In a separate one-day VRRR auction held on the same day for a notified amount of Rs 2 lakh crore, banks submitted bids totaling Rs 1,60,664 crore, all of which were accepted at 5.49 percent.

The divergence underscores commercial banks' reluctance to commit excess funds for nearly a month, even though the RBI provided flexibility. Under the terms of the 29-day auction, lenders were offered an option for premature withdrawal of parked funds through the E-Kuber portal on a two-day notice. Treasury executives noted that as long as the RBI conducts daily auctions, most institutions prefer the flexibility of overnight facilities rather than committing capital to term reverse repos.

Key Details of the Auction

Auction Breakdown and Outcome:

• Notified Amount: Rs 2,00,000 crore
• Bids Received and Accepted: Rs 79,655 crore
• Cut-off and Weighted Average Rate: 5.49 percent
• Reversal Date: November 6, 2026
• Parallel Overnight VRRR Absorption: Rs 1,60,664 crore at 5.49 percent

Liquidity Transmission Dynamics

Draining durable surplus liquidity from the financial system remains a core objective for the central bank to ensure smooth and effective transmission of its monetary policy decisions. When the banking system is flush with cash, short-term money market rates often trade below the benchmark policy rate, blunting the impact of policy adjustments.

System liquidity expanded significantly through August and September on the back of aggressive capital flows and foreign currency deposit mobilisations. While the central bank has stepped up its variable rate operations to absorb excess liquidity under the liquidity adjustment facility (LAF), banks' reluctance to lock into term operations indicates that short-term volatility and liquidity buffers remain primary management considerations for bank treasuries.

Tags: Reserve Bank of India VRRR Banking System Liquidity Money Markets Monetary Policy Committee