Banks expect RBI to double VRRR auction as liquidity stays surplus

At 2-day VRRR auction, RBI receives bids worth ₹97,315 cr against notified ₹1 trn

Banks are expecting the Reserve Bank of India (RBI) to double the size of its variable rate reverse repo (VRRR) auction as liquidity in the banking system continues to stay at a surplus of around ₹3 trillion.

 

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

 

Market participants said that expectation of another VRRR auction of ₹2 trillion led to cautious participation on Wednesday. Additionally, the auction's maturity on Friday coincides with the reversal of the previous VRRR operation, which further weighed on the bidding amount.

 

The overnight Weighted Average Call Rate (WACR) was trading at 5.34 per cent, against the previous day’s close of 5.26 per cent, while overnight TREPS (tri-party repo) rate was trading at 5.29 per cent, against 5.13 per cent on Tuesday. 

 

WACR is the operating target of the monetary policy, which the central bank would like to be closer to the repo rate.

 

“The call rate has inched up to 5.30 per cent, and there is expectation of a ₹2 trillion VRRR announcement either today or tomorrow (Wednesday or Thursday), that is why there is caution,” said a dealer at a primary dealership. “Also there is no clarity whether the RBI wants the overnight rate at 5.50 per cent or between the Standing Deposit Facility (SDF) and the repo rate. The uncertainty is leading to caution at the bidding and higher cutoff,” he added.

 

The net liquidity in the banking system was in a surplus of ₹3.07 trillion on Tuesday, according to the latest RBI data.

 

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.

 

“Considering the shorter tenure, we were expecting some good demand but the overnight rates have gone up because of which banks were not willing to lock in their funds with the RBI,” said V R C Reddy, head of treasury at Karur Vysya Bank. “The overnight rates went up because of the announcement of ₹1 trillion VRRR, and then the bidding was low at the auction because the spread narrowed,” he added.