Banks rush for VRR amid call rate spike
policy repo rate
for the second day in row.
The
Reserve Bank of India
aims to keep the weighted average call rate (WACR) around the policy repo rate, which currently stands at 5.50%.
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WACR, which acts as the operative rate for monetary policy transmission, closed above the policy repo rate for the first time in this fiscal at 5.62% on Tuesday. It rose further and closed at 5.73% on Wednesday.
Meanwhile, the weighted average TREPS (tri-party repo dealing system) rate closed at 5.72% on Wednesday, marginally higher compared with the previous day's 5.69%, CCIL data showed.
The weighted average rate at the two-day
VRR auction
was 5.58%. Overnight rates had increased because of the narrowing in
liquidity surplus
following the GST outflows over the weekend and Friday's variable rate reverse repo rate auction, where banks parked ₹2 lakh crore with the RBI. Liquidity surplus in the banking system currently stands at ₹2.4 lakh crore, close to the RBI's target of 1% of NDTL.
"The spike in rates is because the assessment of daily requirements by the (bank treasury) dealing rooms had gone haywire due to sudden outflows," said Alok Singh, head of treasury,
CSB Bank
.
"Dealers likely thought that once they put funds in VRRR, they would be able to cover any requirement in the market below that rate, but because tax outflows may have happened from some banks, they found a deficit in the overnight cash. So, then they had to borrow funds at whatever rate it was available, hence the spike," Singh said.
Following the spike in call rates, banks also borrowed funds from the RBIs marginal standing facility (MSF) for ₹13,273 crore on Tuesday, highest since May 1 this year, RBI data showed.
After the liquidity infusion via variable rate repo (VRR) auction, overnight rates softened slightly, but they were still above the standing deposit facility (SDF) rate. In June, overnight rates were below or at par with SDF rate.
Liquidity adjustment facility or LAF corridor has the marginal standing facility (MSF) rate, currently at 5.75%, as its upper bound (ceiling) and the SDF rate, currently at 5.25%, as the lower bound (floor), with the policy repo rate in the middle of the corridor.
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