Tech glitch or weak demand? Conflicting claims emerge as RBI launches another liquidity withdrawal op; check details

Tech glitch or weak demand? Conflicting claims emerge as RBI launches another liquidity withdrawal op; check details(AI image)AI Quick ReadThe Reserve Bank of India (RBI) has announced another liquidity withdrawal operation on 7 September.

It will hold an overnight variable rate reverse repo (VRRR) auction worth ₹5 trillion. This followed weak participation in a longer auction aimed at withdrawing ₹7 trillion. Banks offered only ₹2.59 trillion in that auction, which allowed early redemption.

Five traders blamed technical problems for the weak response, according to ET. One trader said a platform change prevented some banks from participating. "The bidding for the VRRR was changed to another platform, as E-Kuber, the usual one, had some technical issues, and hence some banks were caught unaware and were not able to participate," ET quoted the trader as saying.

However, another person denied the technical problems. The trader told Reuters that all bids had passed through the e-Kuber system. The RBI did not respond to Reuters’ request for comment. India’s banking liquidity surplus reached ₹11.6 trillion on 6 September, nearly 4% of deposits.

Sustained surplus liquidity could increase inflation and boost financial asset prices. The RBI recently indicated possible rate increases as inflation and growth strengthen. A treasury official expects another longer reverse repo auction this week.

"Even though the response was not up to the mark, we ​could see another long-duration reverse repo later in the week," the treasury official told Reuters. IDFC First Bank expects the RBI to combine tools to drain excess liquidity.

Gaura Sen Gupta, chief economist at IDFC First Bank, favours market stabilisation scheme bonds and sell-buy swaps. "The ​preferred option ⁠would be a combination of MSS (market stabilisation scheme bonds) and sell-buy swaps.

These two tools would be the least disruptive but are also associated with their own challenges," Reuters quoted Sen ⁠Gupta as saying. RBI currently conducts reverse repos lasting overnight to 15 days. Longer auctions attract less interest because banks hesitate to park funds for extended periods.

India’s banking liquidity surplus reached a record ₹9.7 trillion on 3 September. This exceeded the previous peak of ₹9.2 trillion recorded in September 2021. Banks collected $127.23 billion through the RBI’s foreign currency deposit scheme for non-residents.

Most dollars were exchanged with the RBI, sharply increasing rupee availability. The surplus makes managing liquidity and overnight interest rates more difficult. "While some of the ​surplus...will be ​offset by ⁠higher cash in circulation during the upcoming festive season, maturity of ​forwards, and due to any potential ​RBI ⁠FX intervention, the RBI may have to employ a panoply of liquidity absorption tools to mop ⁠up ​this surplus," Reuters quoted Nomura economists Sonal ​Varma and Aurodeep Nandi as saying in a note.

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