RBI to infuse Rs 25K cr via VRR as liquidity turns deficit after two months

Banking system liquidity fell into deficit mode on Tuesday after more than two months on the back of GST outflows and advanced tax payments, market participants said.

The last time liquidity was in the deficit was on June 27. On Wednesday, the liquidity deficit stood at Rs 2,626 crore, according to the latest data by the Reserve Bank of India (RBI).

Consequently, RBI announced on Thursday that it plans to conduct a 14-day variable rate repo (VRR) auction on Friday to infuse up to Rs 25,000 crore in the banking system.

Market participants said the banking regulator may conduct more VRR auctions to infuse liquidity if the weighted average overnight money market rates do not align with the repo rate. 

The weighted average money market rates settled at 6.53 per cent on Thursday.

It was at 6.63 per cent on Tuesday.

Since August, the weighted average money market rate was hovering under the repo rate, reflecting the impact of surplus liquidity. The repo rate currently stands at 6.50 per cent.

The weighted-average overnight money market rates briefly traded below the standing deposit facility (SDF) rate in August because of surplus liquidity.

The average systemic liquidity surplus in August stood at Rs 1.49 trillion, up from Rs 1.02 trillion in July. Over the past 12 months, the average liquidity was Rs 0.49 trillion

“The RBI may conduct more VRR auctions if the liquidity dries up and more and money market rates fail to align with the repo rate,” said a dealer at a state-owned bank.

In August, the liquidity in the system remained in surplus at Rs 1.46-2.86 trillion, prompting the regulator to conduct multiple variable-rate reverse repo (VRRR) auctions to manage the surplus.

On August 4, the liquidity improved to Rs 2.77 trillion on the back of improved government spending.  

“The liquidity will remain at current level for some time, and then by the end of the month it might improve again because of government spending,” said a dealer at another state-owned bank.