RBI injects liquidity to rein in soaring weighted average call rates

Overnight rates breached MSF ceiling; RBI injects ₹50,000 crore to ease market liquidity

The Reserve Bank of India’s two-day variable rate repo (VRR) auction conducted on Wednesday brought overnight money market rates lower, after they had surged above the marginal standing facility (MSF) rate of 5.75 per cent. 

During early trading, the weighted average call rate (WACR) — the operating target of the central bank’s monetary policy — stood at 6.78 per cent, prompting the central bank to announce a ₹50,000 crore VRR auction. The move drew strong demand and eased rates, with the WACR settling at 5.73 per cent, compared with the previous day’s close of 5.62 per cent. 

The MSF rate, set 25 basis points above the policy repo rate, forms the ceiling of the liquidity adjustment facility (LAF) corridor. The standing deposit facility, 25 basis points below the repo rate, serves as the floor. The current policy repo rate stands at 5.50 per cent. 

 

The RBI received bids totalling ₹71,902 crore against the notified ₹50,000 crore. Market dealers expect the central bank to conduct further VRR auctions should overnight rates again exceed the MSF rate. “The VRR auction was announced because overnight rates breached the MSF rate,” said a dealer at a state-owned bank. “The RBI might conduct more of these auctions if rates breach the MSF again,” he added. 

Later in the day, deals occurred at rates even below the policy repo rate, according to dealers. 

“This shows the RBI’s flexibility -- since they don’t have full control over the quantum of bids, they’re using short-tenure VRRs to keep overnight rates near the repo,” said Gaura Sen Gupta, chief economist at IDFC FIRST Bank. “It’s more of a reaction-based approach. They clearly did not intend for overnight rates to hit the MSF or rise above the repo. Similar issues could arise again during the advance tax payment.” 

Still, market participants noted that the timing of the VRR auction limited its impact on intraday rates. Nearly 70 per cent of the day’s trading had already occurred before the auction announcement, reducing its effectiveness in anchoring market rates. 

“The timing could have been better; 65 per cent-70 per cent of trades had already taken place before the auction was announced,” said a dealer at a primary dealership. “Later, some trades were even below the repo rate,” he added. 

The WACR had breached the RBI’s policy repo rate on Tuesday for the first time in the current financial year, amid outflows related to goods and services tax payments. The banking system’s liquidity surplus stood at ₹2.41 trillion on Tuesday, according to the latest data.