RBI to conduct two-day VRRR auction on Wednesday to soak up ₹1 trillion

The surplus liquidity has kept the overnight weighted average call rate (WACR) near the standing deposit facility (SDF) rate of 5.25 per cent and well below the repo rate of 5.5 per cent

The Reserve Bank of India (RBI) plans to conduct a two-day variable rate reverse repo (VRRR) auction on Wednesday for a notified amount of ₹1 trillion. This move comes as system liquidity remains in surplus of ₹3.4 trillion (as of Monday), despite two seven-day VRRR auctions by the central bank.

 

The surplus liquidity has kept the overnight weighted average call rate (WACR) — the operating target of monetary policy — near the standing deposit facility (SDF) rate of 5.25 per cent and well below the repo rate of 5.5 per cent.

 

“System liquidity will only go up from here as government expenditure picks up, and from September, the cash reserve ratio (CRR) cut will come into effect. This could push liquidity levels to as high as ₹5 trillion by November–December, assuming a neutral impact from foreign exchange operations. So they had to move early to ensure overnight rates remain within the policy corridor. This operation will shift the WACR closer to the repo and, more importantly, pull the tri-party repo (Trep) rate above the SDF, which it had consistently fallen below despite previous seven-day VRRRs,” said Gaura Sen Gupta, chief economist, IDFC FIRST Bank.

 

The 100-basis-point CRR cut will release ₹2.5 trillion into the banking system. 

 

The overnight WACR settled at 5.26 per cent on Tuesday, while the overnight Trep rate settled at 5.13 per cent.

 

Market participants said the auction, maturing on Friday, is expected to draw strong demand from banks.

 

“Because it’s a two-day VRRR, it will attract good demand from banks. The RBI may continue such short-tenure operations as long as the surplus remains above 1 per cent of net demand and time liabilities. With overnight rates currently trading below the repo rate, the central bank is using VRRRs to keep rates within the liquidity adjustment facility corridor, ensuring orderly liquidity conditions without aggressively draining the surplus,” said V R C Reddy, head of treasury at Karur Vysya Bank.

 

The RBI’s VRRR operations are aimed at absorbing surplus liquidity from the system and anchoring short-term rates closer to the policy repo rate.

 

The RBI had received bids amounting to ₹1.7 trillion at its seven-day VRRR auction on Friday, against the notified amount of ₹1 trillion. The central bank accepted ₹1 trillion at a cut-off rate of 5.47 per cent.

 

The recent liquidity surplus can largely be attributed to higher government spending and lower-than-expected goods and services tax collection, which have eased the usual liquidity pressures. As a result, the liquidity drain was not as sharp as foreseen, experts said, adding that with the RBI already having reduced CRR, its room for deploying other measures for liquidity withdrawal — apart from VRRR — is limited.