RBI Likely To Announce Short-Tenor Variable Rate Reverse Repo Auction In Coming Days

The Reserve Bank of India (RBI) is likely to announce a short-tenor variable rate reverse repo (VRRR) auction in the coming days to mop up excess liquidity from the banking system and steer the overnight call money rate closer to the policy repo rate, experts said on Wednesday.

Over the last few weeks, surplus liquidity in the system has remained elevated and banks parked as much as Rs 4.78 lakh crore under the Standing Deposit Facility (SDF) on Tuesday, which reflects limited credit offtake and robust government spending flows, the market experts and an economist told PTI.

The persistent surplus has kept overnight money market rates under pressure, often trading below the repo rate, and this may prompt the central bank to consider active liquidity management measures.

"As liquidity moves into a surplus of over Rs 3 lakh, SDF volume touched Rs 5 lakh crore last week and the weighted average call rate hovers around 0.25%below the repo rate, the RBI may consider fine-tuning the VRRR as a short-term measure to align the overnight rates near repo rate," said Mataprasad Pandey, vice-president at Arete Capital Service.

Similarly, Gaura Sengupta, economist at IDFC First Bank, also said the RBI may announce VRRR auctions as weighted average call rate has persisted below the repo rate.

"Liquidity management focus is on aligning the weighted average call rate with repo rate. In February, for half of the month the Weighted Average Call Money (WACR) rate has been below repo, hence we expect VRRR to be announced," she said.

So far in February, overnight call money rate remained below the repo rate by as much as 0.54%, according to the RBI data. This is due to persistent higher liquidity in the banking system.

Systemic liquidity has turned sharply positive after liquidity injection measures such as open market operations (OMO) purchases of government securities and USD/INR buy/sell swap auctions conducted by the RBI in the last few months.

These liquidity measures not only helped the central bank to bring down the overnight money market rates, but also helped better transmission of the policy rate cut of 1.25% done since last year.

As per RBI data, the central bank has infused Rs 2.5 lakh crore through OMO purchases of government securities so far since the start of this calendar year.

Market participants said conducting shorter-tenure VRRR auctions would enable the RBI to finetune liquidity conditions more effectively.

Such operations would not only absorb excess funds but also provide flexibility to inject liquidity when needed, particularly around the goods and services tax (GST) payment cycle on the 20th of every month.

During the GST outflow period, liquidity in the banking system typically tightens temporarily, leading to upward pressure on overnight rates. By calibrating the tenure and size of VRRR operations, the RBI can reverse liquidity absorption swiftly during these periods to prevent undue volatility in money market rates.

"RBI will ensure that VRRR will mature before GST payment," Sengupta said.

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