RBI's 3-day VRRR sees weak demand amid GST outflows, reporting week

The Reserve Bank of India’s three-day Variable Rate Reverse Repo (VRRR) auction got a tepid response on Tuesday, with the central bank receiving bids worth ₹57,450 crore only, against the notified amount of ₹1 trillion.

 

Market participants said that banks were reluctant to park higher amounts at the auction due to the fortnightly reporting period at the end of the current week. 

There was also uncertainty over the quantum and tenor of upcoming VRRRs. As banks have already parked ₹1.5 trillion at the seven-day VRRR auction on July 11, they were unwilling to lock in more funds, they said. 

 

“The demand was low because it's a fortnight, and there is uncertainty around how many more VRRRs will be conducted and for what tenure,” said a dealer at a state-owned bank. 

The net liquidity in the banking system was in a surplus of ₹2.6 trillion on Monday, latest data by the RBI showed. 

 

“The liquidity surplus is now near ₹2.5 trillion, and overnight rates inched up today (Tuesday),” said a dealer at a primary dealership. “And banks would like to keep some surplus with them ahead of GST outflows,” he added.

 

The overnight Weighted Average Call Rate (WACR) was trading at 5.38 per cent, against the previous day’s close of 5.31 per cent, while overnight tri-party repo rate was trading at 5.30 per cent, against 5.19 per cent on Monday.

 

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

 

A net surplus liquidity of around ₹3 trillion in the banking system has majorly kept the overnight weighted average call rate near the SDF rate of 5.25 per cent and below the repo rate of 5.50 per cent, with TREPS rates also slipping below the SDF.

 

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.