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Informist, Friday, Apr. 17, 2026

By Aaryan Khanna

MUMBAI – Banks have paused the repayment of high-cost repos from the Reserve Bank of India after the central bank conducted back-to-back operations to drain liquidity temporarily, treasury officials said. After accelerating the pace of paying back the 90-day variable rate repos from January last week, banks have turned cautious as the RBI has conducted INR-2.00-trillion, seven-day variable rate reverse repo auctions on consecutive Fridays.

"It looked like the mood had shifted and people were paying that (90-day VRRs) back, because why wouldn't they?" the head of balance sheet management at a private-sector bank said. "But this week no activity like that has happened since RBI has started doing VRRRs and maybe due to GST (goods and services tax outflows) coming up, even though liquidity is still very, very comfortable."

Banks had initially borrowed INR 250.04 billion in the first VRR auction on Jan. 30 at a weighted average rate of 5.40% and then borrowed another INR 1.115 trillion at an INR-2-trillion auction later in the day, with the weighted average rate cooling to 5.26%. Uniquely, market participants were allowed to pre-pay the amount they borrowed, which banks were using with aplomb as they don't foresee needing the buffer before its scheduled redemption on Apr. 30.

Surplus liquidity in the banking system, as measured by the net liquidity absorbed by the RBI, has averaged INR 4.36 trillion so far in April, according to the latest central bank data. The surplus cash with banks peaked to INR 5.55 trillion over the plast weekend, the highest in nearly four years. Under these circumstances, with the weighted average tri-party rates around 4.80% and the weighted average call rate sunk below 5.10%, the higher cost of borrowing through the long-term VRRs was an easy ballast to dispose of, dealers said.

Banks had already begun pre-paying these instruments as early as February, when the RBI accelerated its durable liquidity infusion into the banking system. Less than half of the first VRR remained by Mar. 31 despite both global uncertainty and banks' own cash needs at the end of the financial year. In contrast, banks held INR 1.03 trillion of the second VRR entering April. Those numbers remained unchanged until Apr. 6, but when the week ended on Apr. 10, the holding of the larger VRR shrunk to INR 672.85 billion. The amount borrowed in the first VRR fell by over INR 20 billion to INR 105 billion last week. Since Apr. 10, when the RBI conducted its first VRRR in four months, banks have not prepaid any further amount.

"Banks, including nationalised banks, are beginning to look at the cost of all these long-term VRRs and are not seeing any sense in holding on to them," a call market dealer at a state-owned bank said. "Not all of it will be consumed (repaid) before the due date, but I think most of it should be done since it is unnecessarily giving us negative carry."

Since banks have parked another INR-2-trillion with the RBI at a cut-off rate of 5.24% at the seven-day VRRR Friday, those having positions in both instruments are losing money on a daily basis, but less than they had been doing in money markets. Banks may be holding out ahead of GST outflows next week worth around INR 1.5 trillion-INR 1.8 trillion to allow for more flexibility before finally winding down the rest of their position before the maturity of the 90-day operations at the end of April, dealers said. Some banks had already paid back the entire amount they had borrowed from the RBI in January, they said. 

"It's long overdue. Overnight rates are at 4.85%," a money market dealer at another private-sector bank said. "Not sure what the banks are waiting for."  End

Edited by Deepshikha Bhardwaj

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