Banks roll over maturing VRRR amount; overnight WACR breaches repo rate

The Reserve Bank of India (RBI) received bids worth ₹1.59 trillion against the notified amount of ₹3 trillion in its variable rate reverse repo (VRRR) auctions on Friday, as the overnight weighted average call rate (WACR) rose above the repo rate to 5.6 per cent.

 

The central bank accepted the amount at a cut-off rate of 5.49 per cent.

 

On Friday, the RBI conducted two VRRR auctions, one for six-day tenure and another for three-day tenure, to withdraw a total ₹3 trillion from the banking system.

 

In the first auction of six-day tenure, the RBI received bids worth ₹1.46 trillion against the notified amount of ₹2 trillion. In the three-day tenure one, demand was tepid, with bids worth only ₹13,045 crore against the notified ₹1 trillion.

 

According to market participants, the central bank’s objective was to absorb the maturing amount of more than ₹2.8 trillion, as system liquidity continues to remain in surplus by over ₹3 trillion.

 

On Thursday, net liquidity in the banking system stood at a surplus of ₹3.54 trillion, according to the latest RBI data.

 

“Banks did not roll over the entire maturing amount because the overnight rates rose to around 5.6 per cent,” said a dealer at a state-owned bank. 

 

“When the overnight rates remain below 5.4 per cent, the demand is there at VRRR auctions, but beyond that it doesn’t make sense to park funds there,” he added.

 

The RBI’s VRRR operations are intended to absorb surplus liquidity from the financial system and anchor short-term money market rates closer to the policy repo rate.

 

The WACR, the operating target of monetary policy, settled at 5.58 per cent on Friday, against the previous close of 5.44 per cent.

 

“The VRRR auctions are to stay because we are at ₹3.5 trillion surplus and we have around ₹1 trillion in standing deposit facility (SDF),” said a dealer at a primary dealership.

 

“If the overnight rates continue to rise, we might see variable rate repo (VRR) auctions like we did earlier,” he added.

 

The RBI had conducted two VRR auctions in July when overnight rates were trading near the marginal standing facility (MSF) rate.

 

The MSF rate, set 25 basis points (bps) above the policy repo rate, is the ceiling of the liquidity adjustment facility corridor.

 

The SDF, which is 25 bps below the repo rate, is the floor. The policy repo rate is currently at 5.5 per cent.