RBI likely to replace WACR with TREPS as operative target, says Nomura

Nomura reports that the RBI may shift its liquidity management target from WACR to TREPS or a SORR-like composite, in line with global best practices and increased volumes in secured money markets

The Reserve Bank of India’s (RBI’s) seven-day variable rate reverse repo (VRRR) auction on Friday saw a tepid demand from banks as the auction amount exceeded the market expectation of ₹2 trillion. So, the bidding amount fell short of the notified amount.

 

Additionally, banks preferred to retain funds due to the upcoming goods and services tax (GST) outflows and were reluctant to lock in their money for seven days. The central bank received bids worth ₹1.51 trillion at the auction, against the notified amount of ₹2.5 trillion.

 

The RBI accepted the entire amount at a cut-off rate of 5.49 per cent.

 

“The market was expecting around ₹2 trillion of auction, but the amount was higher than expected. Banks want to keep some of the surplus with themselves. Further, GST outflows are scheduled. So, banks are reluctant to park their funds for seven days. That's why we have seen lower participation,” said a dealer at a primary dealership.

 

Net liquidity in the banking system was a surplus of ₹3.15 trillion on Thursday, according to the latest data of the RBI. 

 

With overnight rates now aligning closely with the policy repo rate, the need for further VRRR operations appears limited, said market participants. 

 

The weighted average call rate (WACR) was trading at 5.47 per cent, near the repo rate of 5.5 per cent.

 

“The RBI’s purpose is to keep the overnight rate within the corridor, between 5.25 per cent and 5.5 per cent. And now, that is in range and more VRRRs are not required,” said a dealer at a primary dealership.

 

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

 

 “We are not expecting any VRRR auction until next Friday. The RBI would also want to avoid draining liquidity during tax outflows,” said a dealer at a state-owned bank.

 

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. The VRRR had attracted bids worth ₹1.7 trillion.

 

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.