Amount parked in RBI's SDF window declines on back of VRRR auctions

The amount parked by banks in the Reserve Bank of India's SDF window has fallen significantly, driven by VRRR auctions, with the call rate aligning closer to the repo rate

The amount parked by banks in the Reserve Bank of India’s (RBI’s) standing deposit facility (SDF) window declined to ₹1.2 trillion from ₹3.26 trillion at the start of the month, following variable rate reverse repo (VRRR) auctions, market participants said.

 

The SDF amount on Thursday was the lowest since April 22 of the current year, latest RBI data showed.

 

“Banks are parking their funds in VRRR; that is why there is a decrease in the SDF amount,” said a money market dealer at a state-owned bank. “The overnight rates have also moved up, with the tri-party repo rate now trading above the SDF rate and the call rate near the repo rate, making it a better option to park overnight funds,” he added.

 

A net surplus liquidity of over ₹3 trillion in the banking system had kept the overnight weighted average call rate near the SDF rate of 5.25 per cent and below the repo rate of 5.5 per cent for much of the past month, with tri-party repo dealing system (Treps) rates also slipping below the SDF. However, following a series of VRRR auctions by the RBI, the call rate has now firmed up to align with the repo rate, while Treps has moved above the SDF rate.

 

The overnight weighted average call rate (WACR) settled at 5.45 per cent on Friday, against the previous day’s close of 5.36 per cent, while the overnight tri-party repo rate settled at 5.3 per cent, compared with 5.25 per cent on Thursday. 

 

WACR is the operating target of monetary policy, which the central bank aims to keep close to the repo rate.

 

Market participants said that given the current alignment of overnight rates with the policy corridor, further VRRR auctions may be unnecessary until the upcoming tax outflows are absorbed.

 

“More VRRR auctions are not required at this point in time, because banks would not be willing to participate ahead of tax outflows,” said a dealer at a primary dealership. “The RBI is expected to conduct the auction in accordance with the evolving liquidity condition,” he added.

 

The RBI’s seven-day VRRR auction on Friday received tepid demand from banks, as the auction amount exceeded the market expectation of ₹2 trillion. As a result, the bidding amount fell short of the notified amount. The central bank received bids worth ₹1.51 trillion at the auction, against the notified amount of ₹2.5 trillion. The entire amount was accepted at a cut-off rate of 5.49 per cent.

 

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.