The Reserve Bank of India (RBI) is likely to conduct more variable rate reverse repo (VRRR) auctions in the coming days to absorb the huge surplus of liquidity in the banking system and align overnight rates to the repo rate, experts said.
“The RBI continues to do VRRR auctions based on the system liquidity and overnight rates. It is finetuning liquidity operations and ensuring the overnight rates are aligned to the repo rate,” said V. Ramachandra Reddy DGM - Head Treasury, The Karur Vysya Bank.
The banking system was flush with liquidity due to government spending, which resulted in overnight call money rates falling sharply below the repo rate.
To counter this, the central bank conducted various VRRR auctions, which helped to a certain extent, but liquidity was still in surplus and overnight rates fell below the repo rate.
Currently, the overnight weighted average call money rates are trading at 6.4899 percent. Liquidity in the banking system stood at Rs 1.58 lakh crore surplus on April 3.
According to Umesh Kumar Tulsyan, managing director of Sovereign Global Markets, a New Delhi-based fund house, apart from government spending, the rupee depreciation will also be another cause of worry and to stop this, the RBI may continue to buy dollars from the system, which will again reinforce the rupee's liquidity.
“There is a high possibility that the frequency of VRRR auctions may increase in the short term,” Tulsyan added.
Further, Mataprasad Pandey, Vice President, Arete Capital Service, said that whenever the RBI sees a muted response in VRRR auctions, it prefers to announce multiple VRRRs, but as such there is no fixed number of VRRRs to be conducted on a daily basis.
Also read: Short-term bond yields may fall after March 31 as liquidity eases: Experts
Muted response in VRRR auctions
Since the start of this week, the central bank has conducted five VRRR auctions, but the response from banks has been muted.
On April 2, the RBI conducted two 3-day VRRR auctions worth Rs 1 lakh crore and Rs 50,000 crore in which banks parked Rs 32,105 crore and 21,325 crore, respectively.
Similarly, two 2-day VRRR auctions were conducted worth Rs 1.25 lakh crore each. Banks showed a very muted response, parking funds worth Rs 2,015 crore in first auction and Rs 22,365 crore in the second auction.
The last auction, worth Rs 1 lakh crore, was conducted today (April 4) with overnight maturity, and banks parked Rs 37,855 crore at a 6.49 percent cut-off rate.
Together, these auctions have helped the overnight weighted average call money rate rise by 4 basis points today to 6.48 percent from 6.44 percent in the previous two trading sessions.
Liquidity conditions
Liquidity in the banking system, which was in deficit of around Rs 62,275.51 crore on March 30, has swung to a Rs 1.57 lakh crore surplus, which experts attribute to government spending.
According to a Kotak Mahindra Bank report dated April 1, inflows worth Rs 2.49 lakh crore were expected during the week from March 30 to April 5. This includes Rs 2 lakh crore worth of government spending, Rs 34,100 crore worth of redemptions of treasury bills and state development loans, as well as Rs 14,500 crore in coupon inflows.
The report added that there is an expectation of outflows to the tune of Rs 94,400 crore this week.
“We expect system liquidity to remain at around Rs 1 lakh crore,” Upasna Bhardwaj, Kotak Mahindra Bank's Chief Economist, said in the report.
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