Imminent advance tax outflows is the reason that banks did not participate in full measure in the variable rate reverse repo auctions (VRRR) auctions conducted by the Reserve Bank of India over the last few days, per the central bank’s assessment.

Overall, in the last four VRRR auctions, banks deployed funds aggregating ₹1,51,733 crore against cumulative notified amount of ₹4.50-lakh crore. Market experts say banks are preserving liquidity as advance tax payments will lead to outflows in mid-June and create temporary liquidity mismatch.

MD Patra, Deputy Governor, RBI, said: “The reason for caution among banks is that there is an imminent advance tax outflow, which is always sizeable, that will happen in the next week. So, they are holding back money for that purpose. But as you saw, we were persevering in our efforts and the fact that we repeated our auctions indicated our purpose which is what we wanted to convey.” 

Patra emphasised that it is important, therefore, to withdraw that excess liquidity so that the softening of deposit rate and lending rate was more aligned with what the interest rate cycle is and that is why RBI has withdrawn ₹1.5-lakh crore so far.

To a question whether RBI prefers VRRR over variable rate repo (VRR) auction, Governor Shaktikanta Das said: “Whether there is a preference for VRR or VRRR that depends on the prevailing situation in the market and we will remain nimble and flexible and act swiftly as we have done over the last four days.

“We will do two sided (liquidity management) operations as per requirement. There is still some amount of liquidity sitting there, and when we say banks are cautious, let us remember that through the VRRR auctions till yesterday about 1.50 lakh crore have been mopped up through VRRR operations.”

Das emphasised that it is necessary that any segment of the market does not prematurely assume certain things and then start cutting rates, whether on the asset side or on the deposit side.

“...Banks are free to do it (decide on deposit and lending rates, its their commercial decision), but if they are doing it on the assumption of a certain action which is likely to be taken by RBI, I think that would be wrong.

“Our liquidity action also should be seen in the context that our monetary policy stance and our policy rate are well aligned with the interest rates which are prevailing in the market including banks.”

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