The Reserve Bank of India has decided to merge the 28-day variable rate reverse repo (VRRR) auctions with the fortnightly 14-day main auction in view of the moderation in surplus liquidity.

“Consequently, from now on, only 14- day VRRR auctions will be conducted. Fine-tuning operations of various maturities for absorption as well as injection of liquidity will continue as may be necessary from time to time,” Governor Shaktikanta Das said.

Liquidity forecasting

Das noted that surplus liquidity in the banking system, as reflected in average daily absorptions under the liquidity adjustment facility (LAF) [both Standing Deposit Facility/SDF and VRRR auctions], moderated to ₹2.3 lakh crore during August - September 2022 (up to September 28) from ₹3.8 lakh crore during June-July.

RK Gurumurthy, Head-Treasury, Dhanlaxmi Bank, observed that liquidity in the system is still ₹2.3 lakh crore, and RBI’s future actions may possibly be oriented towards reducing what it considers durable liquidity.

‘The tweaking and merging of the 28day & 14day VRRR is perhaps an admittance of the volatility in overnight rates and the rising incidence of large amounts in the daily MSF & SDF windows. Liquidity forecasting is indeed becoming difficult as MSF is the new normal floor rate,” he said.

The Governor observed that GST and advance tax payments coupled with forex outflows moderated the surplus liquidity conditions in the third week of September.

“This necessitated recourse to the marginal standing facility (MSF) by banks and liquidity injection by the RBI through variable rate repo (VRR) auctions.

“This temporary moderation of surplus liquidity needs to be seen in the context of the large potential liquidity in the system arising from the expected pick-up in government spending that usually happens in the second half of the year,” Das said.

Furthermore, drawdown of excess cash reserve ratio (CRR) and excess statutory liquidity ratio (SLR) holdings of banks can also augment system liquidity.