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RBI to conduct 2-day VRRR auction to drain Rs 1 trillion in liquidity
The surplus liquidity has kept the overnight weighted average call rate (WACR) — the operating target of monetary policy — near the Standing Deposit Facility (SDF) rate of 5.25 percent, and much below the repo rate of 5.50 percent.
'System liquidity will only increase from here as government expenditure picks up, and from September, the CRR cut will come into effect. This could push liquidity levels to as high as Rs 5 trillion by November–December, assuming neutral impact from foreign exchange operations. So, they had to move early to ensure overnight rates remain within the policy corridor. This operation will shift the weighted average call rate closer to the repo rate and, more importantly, pull the TREPS rate above the SDF, which it had consistently fallen below despite previous 7-day VRRRs,' said Gaura Sen Gupta, Chief Economist at IDFC FIRST Bank. 'The 100 bps CRR cut will release Rs 2.5 trillion into the banking system.'
The overnight WACR settled at 5.26 percent on Tuesday, while the overnight TREPS rate settled at 5.13 percent.
Market participants said that the auction, maturing on Friday, is expected to draw strong demand from banks.
'Because it's a two-day VRRR, it will attract good demand from banks. The RBI may continue such short-tenure operations as long as surplus remains above 1 percent of NDTL. With overnight rates currently trading below the repo rate, the central bank is using VRRRs to keep rates within the LAF corridor, ensuring orderly liquidity conditions without aggressively draining surplus,' said V R C. Reddy, head of treasury at Karur Vysya Bank.
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.
The RBI had received bids amounting to Rs 1.70 trillion at its seven-day Variable Rate Reverse Repo (VRRR) auction on Friday, against the notified amount of Rs 1 trillion. The central bank accepted Rs 1 trillion at a cut-off rate of 5.47 percent.
The recent liquidity surplus can largely be attributed to higher government spending and lower-than-expected GST collections, which have eased the usual liquidity pressures. As a result, the liquidity drain was not as sharp as anticipated, experts said, adding that with the RBI already having reduced the Cash Reserve Ratio (CRR), its room for deploying other measures for liquidity withdrawal apart from VRRR is limited.
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