RBI’s 4-day VRRR auction draws ₹1.3 trn bids as overnight rates edge higher | Finance News
The Reserve Bank of India’s (RBI’s) four-day variable rate reverse repo (VRRR) auction received bids worth ₹1.3 trillion on Thursday against the notified amount of ₹1.5 trillion,
The central bank conducted the auction to absorb surplus liquidity from the banking system and keep overnight rates aligned with the policy rate, said the market participant.
Following the auction, the weighted average call rate (WACR), which is the operating target of the monetary policy, rose to 5.18 per cent from 5.05 per cent in the previous session. However, liquidity conditions remained comfortable, with surplus liquidity in the banking system at ₹3.44 trillion on Wednesday, according to the latest RBI data.
Market participants said rates of the overnight tri-party repo (TREPS) had slipped below the Standing Deposit Facility (SDF) rate of 5 per cent, prompting the central bank to absorb excess funds.
“The rates in TREPS had fallen below 5 per cent. The RBI wants overnight rates to remain around the repo rate rather than below the floor of the policy corridor. The VRRR is being used to absorb temporary surplus liquidity and align money market rates with the policy rate,” said a treasury official at a state-owned bank.
The official said the current liquidity surplus is expected to moderate over the coming weeks because of forward book maturities and higher currency leakage, making the need for liquidity absorption temporary.
In its monetary policy statement on Wednesday, the RBI had said liquidity conditions are expected to remain in surplus during August before moderating thereafter. The central bank also reiterated that it would undertake fine-tuning operations, including VRRR auctions, whenever warranted.
A VRRR auction is a liquidity absorption tool through which the RBI temporarily absorbs surplus funds from banks. The operation is aimed at preventing overnight money market rates from falling significantly below the policy corridor while retaining adequate liquidity in the banking system.
“The current liquidity surplus is transient. As forward book maturities and currency leakage reduce surplus liquidity over the coming weeks, the need for VRRR auctions will also diminish,” said a dealer at a private bank.
