RBI’s Five-Day VRR Auction Proving Not Enough To Manage Liquidity

Banking system liquidity remains in a deficit of Rs 2.09 lakh crore as of Jan. 14.

(RBI signage at its headquarters in Mumbai Photo source: Vijay Sartape/NDTV Profit)

Bankers did not actively subscribe to the five-day variable rate repo auctions conducted by the Reserve Bank of India on Wednesday, as it is proving to be a temporary market intervention tool to improve liquidity conditions in the banking system, five treasury officials told NDTV Profit.

RBI conducted a five-day VRR auction with a notified amount of Rs 75,000 crore and banks had submitted bids worth Rs 3,980 crore. This is in contrast to its four-day VRR auction on Monday, with a notified amount of Rs 50,000 crore, which received total bids worth Rs 86,155 crore.

Banking system liquidity remains in a deficit of Rs 2.09 lakh crore as of Jan. 14.

According to treasury officials, liquidity constraints remains and these short-term VRR auctions of four, five and 14 days provide little respite on liquidity. While it helps in temporarily managing liquidity, it cannot be used for lending, they said.

RBI usually conducts VRR auctions to inject liquidity into the banking system when it turns into deficit mode.

The overnight rate falling below the repo rate of 6.50% to 6.40% also shows that incremental demand is limited as the RBI has infused temporary liquidity. But it is still not a permanent solution with the goods and services tax outflows set for next week.

"Till the time there is some durable infusion of liquidity, this situation is likely to continue. The next VRR will again see good demand and volatility in call rates will continue depending on the quantum, timing and tenor of the next VRR," Anil Gupta, vice president of financial sector ratings at ICRA, said.

Some market participants expect the RBI to conduct longer-term VRR auctions, such as 28 days or further, as it may at least help cool down the system but others believe that it may also not be enough, as it will create friction for banks and they may not be able to reverse those transactions.

Whether the RBI will continue to conduct such short-term VRR auctions or go for long-term VRR auctions to improve liquidity is yet to be known. But it may have to resort to more sustainable measures of market intervention tools if the quantum of deficit persists post-March, people said.

Nomura Research expects liquidity to remain in deficit mode till the end of this quarter.

Another section of the market does not expect the RBI to infuse durable liquidity because if there is some visibility provided to the currency market that liquidity is available, traders might want to sell or short sell, leading to further pressure on the currency and likely rising risks to inflation going forward.

Increasing foreign exchange intervention by the RBI has largely been the reason behind this decrease in overall banking liquidity. Direct interventions require the RBI to sell dollars to the system while rupee liquidity is sucked out.

On Monday, the Indian rupee declined past the psychologically crucial level of 86 against the dollar after better-than-expected US jobs data led to an expectation that the Federal Reserve would go easy on rate cuts.

Also Read: Fund Managers See RBI Boosting Liquidity Before India Rate Cuts

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