RBI's 7-day VRRR receives significant demand due to reversal of ₹2 trillion

The RBI accepted Rs. 1.25 trillion in the 7-day VRRR auction at a cut-off rate of 5.49%, with a major uptick in demand after last week's Rs. 2 trillion reversal

The Reserve Bank of India (RBI) received bids worth ₹1.42 trillion against a notified amount of Rs. 1.25 trillion when the seven-day Variable Rate Reverse Repo (VRRR) auction ended on Friday. The significant demand at the auction was on the back of the previous week’s reversal of ₹2 trillion that banks had parked with the RBI.

 

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

 

“The demand was there because of the reversal of Rs. 2 trillion,” said a dealer at a state-owned bank. “Given that money market rates have softened again, VRRR auctions are expected to continue,” he said.

 

In money markets, the weighted average overnight call rate — the operating target of monetary policy — fell to 5.39 per cent from the previous day’s 5.54 per cent.

 

The RBI this week conducted two variable rate repo (VRR) auctions after the overnight money market rates rose beyond the repo rate. The RBI’s two-day VRR auction on Wednesday led to a decline in overnight money market rates, which had been trading above the Marginal Standing Facility (MSF) rate of 5.75 per cent. 

 

The MSF rate, set 25 basis points (bps) above the policy repo rate, is the ceiling of the liquidity adjustment facility corridor. The standing deposit facility, which is 25 bps below the repo rate, is the floor. The policy repo rate is currently at 5.5 per cent.

 

Market participants said that the fine-tuning through VRR auctions became necessary due to the large withdrawal during a week of liquidity stress. Next week, the RBI may not need a VRR because government spending typically picks up in the last week of the month, they said.

 

“We don’t expect more VR₹now, but a similar situation can arise around September 15 during tax outflows the RBI might come back with VRR again around that time,” said a dealer at a primary dealership.