Banks don’t want to lock up funds in longer tenor VRRR auctions and miss out on loan deployment opportunities, says expert

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Andrii Yalanskyi

The two variable rate reverse repo (VRRR) auctions conducted by the Reserve Bank of India on Monday to absorb rising surplus liquidity from the banking system attracted more deployment interest from banks in one-day tenor than 30-day tenor.This is a clear indication that banks want to keep the powder dry in the run-up to the quarter end. Should loan demand arise, they can quickly channelise funds deployed at the overnight VRRR auction.The liquidity surplus is on account of fresh 3-5-year foreign currency non-resident (bank)/ FCNR (B) deposits mobilised by banks under the RBI’s concessional swap facility, which was open for 85-days from June 8 to August 31, 2026.Liquidity surplusSince August-end, excess liquidity in the banking system has swelled by ₹4,50,658.16 crore to ₹11,16,006.50 crore as on September 6.At the first VRRR auction of 30-day tenor to absorb ₹7 lakh crore from banks on Monday, the RBI received and accepted funds deployment offers aggregating ₹2,59,276 crore at a weighted average rate (WAR) of 5.24 per cent.At the second VRRR auction of one-day tenor to drain out ₹5 lakh crore from banks, the RBI received and accepted funds deployment offers aggregating ₹3,53,390 crore at a WAR of 5.24 per cent.K Arvind, Head-Treasury, Tamilnad Mercantile Bank, observed that banks don’t want to lock up funds in longer tenor VRRR auctions and miss out on loan deployment opportunities, should they arise in the interim, which fetch higher interest rates. So, they are more inclined to deploy funds in short-tenor VRRR auctions.Bankers expect system liquidity surplus to swell to about ₹12 lakh crore by September 11, the last day for banks to swap the proceeds of the fresh FCNR (B) they raised between June 8 and August 31 with RBI.After RBI introduced a special USD-INR forex swap facility covering FCNR(B) deposits, ECB and OFCB inflows on June 8, a total of $136.38 billion has flowed into the country up to August 31, 2026. Of this, banks alone mobilised $127.23 billion via FCNR(B) deposits.Published on September 7, 2026