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With overnight money market rates softening substantially, the Reserve Bank of India (RBI) conducted one-day variable rate reverse repo (VRRR) auction twice for the second day in succession on Wednesday to suck out liquidity from the banking system and push up the rates above the repo rate.
In a surprise move, the central bank had conducted two one-day VRRR auctions on Tuesday. This was probably the first instance of two such auctions being conducted on a single day.
In the first VRRR auction, the RBI received offers from banks for deploying funds aggregating ₹96,093 crore for a day against the notified amount of ₹50,000 crore. The central bank absorbed ₹50,019 crore at a weighted average rate (WAR) of 6.49 per cent.
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In the second one-day VRRR auction, banks made offers to park funds aggregating ₹11,829 crore against the notified amount of ₹50,000 crore. The RBI accepted the funds at the same WAR as the first auction.
Though the WAR in the overnight money market was higher at 6.41 per cent against previous day’s 6.35 per cent (per CCIL data), it had dipped to an intraday low of 6.25 per cent in the case of TREPS (Treasury Bills Repurchase) and 6.20 per cent in the case of REPO (tri-party repurchase) segments.
Easing liquidity deficity
Market players are of the view that by conducting two VRRR auctions, the central bank is trying to guide the overnight rate above the repo rate (6.50 per cent), in sync with its ‘withdrawal of accommodation’ monetary policy stance.
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“By end January (as on 28-January), the general government cash surplus stood at a high of ₹4.2 lakh crore…However, the recent week has seen liquidity deficit easing to sub-₹1.5-lakh crore, with TREPs below SDF (standing deposit facility: 6.25 per cent), while the RBI is now doing mild VRRRs to keep overnight rates above the repo rate.
“We understand that the RBI would be biased to keep overnight rates more aligned towards the repo rate than MSF (marginal standing facility: 6.75 per cent)/SDF ahead. A part of this would be naturally achieved ahead,” said Madhavi Arora, Lead Economist, Emkay Global Financial Services.
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