Muted response to RBI's VRRR as overnight rates rise, reducing arbitrage

With WACR and tri-party repo rates climbing, banks park only ₹13,075 crore against RBI's ₹50,000 crore offer in overnight VRRR auction

The Reserve Bank of India’s (RBI) overnight variable rate reverse repo (VRRR) auction on Thursday received a tepid response from banks, with only ₹13,075 crore parked against the notified amount of ₹50,000 crore. The subdued participation is attributed to a rise in overnight money market rates, which has made the VRRR window less attractive.

 

The central bank accepted the bids at a cut-off rate of 5.49 per cent. Separately, the RBI on Thursday said it will conduct a seven-day VRRR auction to absorb ₹2 trillion from the banking system. Market participants said the move follows the maturity of approximately ₹1.88 trillion on the same day.

 

The RBI conducts VRRR operations to absorb excess liquidity from the banking system and anchor short-term interest rates closer to the policy repo rate. As per the latest data, the net liquidity surplus stood at ₹2.54 trillion.

 

“Banks have already parked around ₹1.75 trillion with the RBI. With overnight rates moving up, it doesn't make sense to park funds at the VRRR rate,” said the treasury head at a private sector bank.

 

The Weighted Average Call Rate (WACR) — the key operating target of the RBI’s monetary policy — closed at 5.49 per cent on Thursday, up from 5.37 per cent the previous day. Similarly, the overnight tri-party repo rate rose to 5.43 per cent from Wednesday’s 5.33 per cent.

Preference shifts toward higher-yielding money market

“The bidding is good when overnight rates are near the standing deposit facility (SDF), but when they are between 5.40 per cent and 5.45 per cent, banks prefer parking funds in the money market rather than at the VRRR window,” the treasury official explained.

 

Earlier this week, RBI’s three-day VRRR auction on Tuesday had drawn bids worth ₹46,058 crore against the same notified amount of ₹50,000 crore—significantly higher than Thursday’s outcome.

 

As overnight rates approach the repo rate, arbitrage opportunities via the VRRR route diminish, prompting banks to hold or deploy funds elsewhere in the short-term money market.