RBI's 3-day VRR auction receives muted demand amid surplus liquidity

Banks bid far below the notified amount at the RBI's short-term repo auction as surplus liquidity reduced the need for additional funds

The Reserve Bank of India (RBI) received bids worth ₹7,091 crore against the notified amount of ₹50,000 crore at the three-day variable rate repo (VRR) auction on Tuesday. The central bank allotted the bid amount at a weighted average rate of 5.26 per cent.

 

The weak demand at the auction was due to ample liquidity in the banking system, said dealers. Net liquidity in the banking system stood at a surplus of ₹1.94 trillion on Monday, according to the latest central bank data.

 

The weighted average overnight call rate fell to 5.25 per cent after the VRR auction, against the previous close of 5.31 per cent. The call rate remains elevated as the money market is increasingly pricing in the possibility of a rate hike. Three-month and six-month overnight indexed swap (OIS) rates have also edged higher, with the call rate tracking the same trend. The one-month OIS rate settled at 5.40 per cent on Tuesday against the previous close of 5.37 per cent.

   

“The VRR auction could not attract much demand because there is ample liquidity,” said a dealer at a primary dealership. “Call rate has inched up because the market is now looking at a rate hike,” he added.

 

VRR auctions allow banks to borrow funds from the RBI against government securities (G-Secs) at market-determined rates, helping the central bank manage short-term liquidity in the financial system.

 

The central bank actively uses variable rate repo and reverse repo operations to keep overnight rates within the liquidity adjustment facility (LAF) corridor, bounded by the standing deposit facility (SDF) rate at the lower end and the marginal standing facility (MSF) rate at the upper end, while ensuring that the weighted average call rate remains closely aligned with the policy repo rate, the operating target of monetary policy.

 

“The VRR requires collateral, which is not the case in call market. The rate difference was also not much, which made call market more preferable,” said a dealer at another primary dealership.