With an improvement in the credit growth, banks have been opting to park their surplus funds under the Reserve Bank of India (RBI)’s standing deposit facility (SDF), which is an overnight window, rather than 14-day variable rate reverse repo (VRRR) auctions.
As the 50-basis-point (bps) hike in the cash reserve ratio (CRR) kicked in on May 21, surplus liquidity in the system has been steadily falling. The June 3 VRRR auction attracted offers worth Rs 64,965 crore, compared with offers worth Rs 2.72 trillion received in the auction held on May 20. The notified amount in both the auctions was Rs 4 trillion.
Economists FE spoke to said given the current situation in credit markets, it makes more sense for banks to not lock in funds for 14 days, even though they earn more through the VRRR route.
Madan Sabnavis, chief economist at Bank of Baroda, explained that banks use VRRR when they think they are not going to need the funds for 14 days or a longer time period. “Ever since the SDF was launched, Rs 3.7 trillion has gone into it. Around two months back, a significant amount of money was going into VRRR. Then there was some last-minute demand for credit and banks actually had to go back to a special repo window opened by the RBI.”
Sabnavis estimates that so far the CRR hike may have sucked out about Rs 75,000-80,000 crore worth of liquidity and that could be the main reason behind the surplus in the system falling to Rs 4-4.5 trillion from Rs 6-7 trillion.
As a result, overall surpluses parked under both the SDF and VRRR windows have started to fall. Soumyajit Niyogi, associate director, core analytical group, India Ratings & Research, said the surplus liquidity has considerably come down because of the CRR hike, outflows from the equity markets and rising current account deficit.
Whatever surplus banks now have, they are parking under the SDF window. At this stage, when the policy is right around the corner, banks don’t want to lock in funds under the 14-day window,” he said.
In a report dated May 23, economists at Kotak Mahindra Bank said the outstanding VRRR decreased to Rs 3.06 trillion from Rs 3.88 trillion a week before, and the amount held under the SDF fell to Rs 1.39 trillion from Rs 2.22 trillion. System liquidity surplus has tightened further thereafter amid outflows towards GST collections and RBI auctions.
Both Sabnavis and Niyogi said another CRR hike in the June policy is unlikely, but the CRR could rise later in the year. “Whenever that happens, it will create room for open market operations (OMOs). So, the RBI can hike CRR and go for OMO purchases simultaneously. We can expect the CRR to go to 5% this year,” Niyogi said.
Going by the RBI’s commentary during the May policy, Sabnavis expects the monetary policy committee to go step by step and hike the repo by 25-35 bps in the June policy. “Rather than going for an odd number, they might make a 75-bps hike, including 40 bps in May. Eventually, the CRR could go up by another 50 bps, but it will be situation-based,” he said.