RBI is exploring using Long Term Variable Rate Reverse Repo (LTRR) auctions to absorb excess liquidity from banks for longer durations. However, banks are wary of locking funds into longer tenors under LTRR in case credit demand increases, as it would limit their ability to meet demand. Banks prefer investing in short-term treasury bills to maintain flexibility. While RBI aims to gradually reduce liquidity, current surplus liquidity in the banking system is large at an estimated Rs. 7.5-8 lakh crore.
RBI is exploring using Long Term Variable Rate Reverse Repo (LTRR) auctions to absorb excess liquidity from banks for longer durations. However, banks are wary of locking funds into longer tenors under LTRR in case credit demand increases, as it would limit their ability to meet demand. Banks prefer investing in short-term treasury bills to maintain flexibility. While RBI aims to gradually reduce liquidity, current surplus liquidity in the banking system is large at an estimated Rs. 7.5-8 lakh crore.
RBI is exploring using Long Term Variable Rate Reverse Repo (LTRR) auctions to absorb excess liquidity from banks for longer durations. However, banks are wary of locking funds into longer tenors under LTRR in case credit demand increases, as it would limit their ability to meet demand. Banks prefer investing in short-term treasury bills to maintain flexibility. While RBI aims to gradually reduce liquidity, current surplus liquidity in the banking system is large at an estimated Rs. 7.5-8 lakh crore.
But lenders wary of locking-in for longer Variable Rate Reverse Repo (VRRR) auction held on July tenors in case credit demand picks up 30, 2021, the RBI received bids to park surplus liquidity ag- K RAM KUMAR framework. It has a tenor of gregating to ₹3,67,428 crore Mumbai, August 5 over 14 days. against the notified ₹2-lakh The Reserve Bank of India However, banks are wary of crore. (RBI) is understood to have locking-up liquidity for The central bank accepted broached the possibility of longer tenors of, say, a month bids, aggregating ₹2,00,033 conducting Long Term Vari- or two under LTRR because in crore, with the weighted aver- able Rate Reverse Repo (LTRR) case credit demand gains age interest rate that banks auctions with banks in the steam, they will have to tap will receive working out to Banks prefer investing in run-up to the normalisation funding options such as the 3.43 per cent. treasury bills of its ultra-accommodative central bank’s repo (repur- Radhika Rao, Senior Eco- policy. chase agreement) window, for loans. However, if they in- nomist, DBS, observed that The central bank is explor- certificate of deposits, among vest in LTRR, this flexibility the RBI’s preference to gradu- ing LTRR as an instrument to others, to meet their de- will not be available. ally draw out excess liquidity absorb surplus liquidity for a mand. They may even have to That banks are awash with might increase the sizes of longer duration from the increase fixed deposit rates. liquidity is underscored by VRRR auctions while reaf- banking system at a time the fact that they collectively firming support for the ongo- when credit demand is Banks’ preference parked ₹6,53,431 crore with ing Government Securities muted, and retail inflation is Banks have indicated to the the RBI’s reverse repo win- Acquisition Program. sticky. RBI that they prefer investing dow on August 4, 2021. Banks As per Rao’s assessment, LTRR is one of the instru- in treasury bills of 91 days, 182 earn 3.35 per cent interest (re- the impact of a VRRR increase ments to manage durable li- days and 364 days duration as verse repo rate) on this might be marginal given the quidity under the RBI’s re- the bills can be easily liquid- amount. scale of surplus liquidity (es- vised liquidity management ated to fund future demand Further, at the last 14-day timated at ₹7.5-8 lakh crore).