Banks cautious about parking extra cash in RBI's variable rate window

economictimes.indiatimes.com:

Banks are cautious about deploying excess funds with the central bank as lenders are unsure as to how long recently withdrawn ₹2,000 notes will remain in the system even as overall demand for loans remains firm, exerting pressure on liquidity. In eight variable rate reverse repo (VRRR) auctions that the Reserve Bank of India has carried out since June 30, banks have on an average deployed 50% of the sum that the central bank has offered to mop up. On most occasions, lenders have preferred to park more of their surplus funds at the RBI's standing deposit facility (SDF) window.

The reluctance to park funds for long comes despite a sharp increase in surplus liquidity over the past couple of weeks following government expenditure. On an average, the RBI has absorbed surplus funds worth ₹1.87 trillion rupees from banks this month. Tellingly, the rate of interest offered to banks by the SDF is sharply lower than what lenders would have earned by parking funds at the VRRR auctions.

This reflects the continuing uncertainty amongst lenders about the liquidity outlook. «Banks are playing it safe, and they have been doing it for the last few months, right from April onwards. They don't want to lock up funds for a longer period.

The VRRR for shorter periods see more interest. The differential between the SDF and the VRRR is 24 basis points. So, they prefer to put surplus funds in SDF, that too, over ₹1 trillion (lakh crore) daily,» Madan Sabnavis, chief economist, Bank of Baroda said.

The SDF, which is the lower bound of the interest rate corridor, bears an interest rate of 6.25%, whereas the cutoffs at variable rate reverse repo auctions are set 1 basis point lower than the repo rate. The repo rate is at 6.50%. For banks, letting