RBI set to conduct 7-day VRRR auction on Friday to absorb ₹2.5 trillion

The Reserve Bank of India will conduct a Rs 2.5 trillion seven-day reverse repo auction to absorb surplus liquidity from the banking system and align the weighted average call rate with the repo rate

The Reserve Bank of India (RBI) will conduct a seven-day Variable Rate Reverse Repo (VRRR) auction on Friday to absorb ₹2.5 trillion from the banking system, the central bank said today.

 

Despite having conducted three VRRR auctions worth ₹1 trillion each, liquidity in the banking system remains in surplus by more than ₹3 trillion, which prompted the RBI to more than double the auction amount, said dealers. They also noted that the auction amount exceeded the market expectation of ₹2 trillion, and as a result, the bidding amount is expected to fall short of the notified amount.

 

With this large auction, the central bank aims to move the weighted average call rate (WACR) – the operating target of the monetary policy – closer to the policy repo rate, which is currently at 5.5 per cent.

 

“The market was expecting around ₹2 trillion, but they went with ₹2.5 trillion. The market has now factored in that the RBI wants to keep overnight rates near the repo rate. I expect the bidding to be lower than the notified amount,” said the treasury head at a private bank.

 

The overnight Weighted Average Call Rate (WACR) settled at 5.36 per cent, compared to the previous day’s close of 5.32 per cent, while the overnight Tri-party repo rate settled at 5.25 per cent, compared to 5.29 per cent on Wednesday. 

 

The RBI had received bids worth ₹97,315 crore in its two-day VRRR auction on Wednesday, against the notified amount of ₹1 trillion. The central bank accepted the entire bid amount at a cut-off rate of 5.49 per cent, higher than the 5.47 per cent cut-off in the previous seven-day VRRR auction held on July 4, which had attracted bids worth ₹1.7 trillion.

 

Market participants said that the auction amount matures before GST outflows, which might support some demand at the auction.

 

“The amount is maturing before the tax outflows, so there will be ample liquidity then. I see good demand, but the amount won’t be fully subscribed,” said the treasury head at another private bank.

 

Liquidity surplus in the banking system – indicated by the amount of funds banks parked with the central bank – was ₹3.26 trillion on Wednesday, according to the latest data from the RBI. 

 

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. Shorter tenure auctions do not impact durable liquidity, the central bank had clarified.