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RBI sees tepid demand at overnight VRR Auction ahead of ₹2 trn reversal
Market participants said that the bids were lower because of the reversal of VRRR funds worth Rs. 2 trillion on Friday.
'It was an overnight auction, and there is a reversal of Rs 2 trillion tomorrow (Friday), that's why there was no demand at the VRR auction,' said V R C. Reddy, head of treasury at Karur Vysya Bank. 'The RBI may have anticipated that overnight rates would remain elevated today, which likely prompted the auction. Their objective is to keep the overnight rate within the Standing Deposit Facility (SDF)–repo corridor, and not near the Marginal Standing Facility (MSF),' he added.
The marginal standing facility rate, set 25 bps above the policy repo rate, is the ceiling of the liquidity adjustment facility corridor. The standing deposit facility, which is 25 bps below the repo rate, is the floor. The policy repo rate is currently at 5.5 per cent.
The RBI's two-day VRR auction conducted on Wednesday led to a decline in overnight money market rates, which had been trading above the MSF rate of 5.75 per cent.
Market participants said that fine-tuning via VRR auctions became necessary due to the large withdrawal during a week of liquidity stress. Next week, the RBI may not need a VRR because government spending typically picks up in the last week of the month, they said.
'The banks needed funds after parking Rs 2 trillion at the seven-day VRRR auction last Friday; hence the VRR auction was conducted,' said the treasury head at a private bank. 'Next week, when government spending kicks in, we won't need VRRs,' he added.
After government spending resumes in early August, VRRRs are expected to continue given the significant surplus liquidity in the banking system, said market participants.
The net liquidity in the banking system was in a surplus of Rs 2.17 trillion on Wednesday, the latest data from the RBI showed.
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