Despite the prevalence of a large surplus of liquidity in the system, banks have shown reluctance to park excess funds with the Reserve Bank of India, preferring to hold onto cash ahead of crucial events in the coming days.
Following a heavily undersubscribed 14-day variable rate reverse repo (VRRR) operation on June 2, the RBI has held a VRRR auction on the first three days of the current week, signalling its desire to absorb the surplus funds with banks. Reverse repo operations are one of the tools used by the central bank to drain out excess liquidity from the banking system. At the end of the tenure of a VRRR, the funds return to banks.
With the liquidity surplus currently at around ₹2 lakh crore, the overnight call money rate has remained on the lower side, driving down banks’ cost of funds.