RBI doubles 10-day VRR amount to ₹1.5 trn due to expected tax outflows

The Reserve Bank of India has doubled the notified amount of the 10-day variable rate repo (VRR) auction, scheduled for Tuesday, to Rs 1.5 trillion from Rs 75,000 crore, the central bank said on Monday.

 

“On a review of current and evolving liquidity conditions, it has been decided to increase the notified amount for the 10-day VRR auction,” RBI said in a release.

 

Market participants said the decision to double the VRR amount was due to outflows due to advance tax and goods and services tax (GST) collections, expected to be Rs 2 trillion.

 

Usually, for every quarter-end, advance tax payments take place on the 15th of the last month of a quarter, and GST payments take place on 20-21 of every month.

 

“On December 15, advance tax collections come in, which typically lead to a system liquidity leakage of more than Rs 1 trillion. This period also overlaps with the GST payment window — another Rs 1 trillion goes out around December 20. Government expenditure, however, only picks up towards the end of the month and reflects in the system in the first week of January,” said Gaura Sen Gupta, chief economist, IDFC First Bank.

 

“The RBI has tried to manage this by conducting an OMO of Rs 1 trillion and a buy-sell swap of Rs 1.5 trillion, which broadly neutralises the impact, meaning there is no lasting effect on system liquidity. So, even though the RBI has infused Rs 1.5 trillion and core liquidity may appear comfortable, system liquidity will tighten mid-month and ease only towards month-end when government spending begins. What the RBI is effectively providing is a transient liquidity infusion,” she added.

 

Dealers said that the previous VRR auction, which was held on Monday, was not fully subscribed, with banks borrowing Rs 24,969 crore against the notified amount of Rs 75,000 crore at a cut-off rate of 5.26 per cent.