MC EXCLUSIVE RBI may conduct more VRRR auctions as liquidity remains in huge surplus

Reserve Bank of India

The Reserve Bank of India (RBI) is expected to conduct more variable rate reverse repo (VRRR) auctions to remove excess funds from the banking system and maintain liquidity at 1 percent of net demand and time liabilities (NDTL), money market experts said.

Economists added that the announcement of the VRRR auctions would hinge on the need to manage liquidity daily so that it remains at the target surplus to NDTL.

“Announcement of VRRR is not dependent on alignment of call to repo but rather on the daily liquidity management and maintenance of the 1 percent of NDTL surplus level,” said Dipanwita Mazumdar, economist at Bank of Baroda.

Expectations of additional VRRR auctions increased since the liquidity in the banking system remained in huge surplus despite the central bank having conducted one such auction last week. Last week, the RBI conducted a seven-day VRRR auction to siphon Rs 84,975 crore.

Going by RBI data, liquidity in the system was estimated to be in surplus of around Rs 2.62 lakh crore as on June 30.

According to Madhavi Arora, chief economist at Emkay Global Financial Services, more liquidity is likely on account of month-end government spending. “We keep an eye on global idiosyncrasies, which could impact FX (foreign exchange) flows and Indian rupee liquidity amid possible FX intervention,” Arora said.

The higher surplus liquidity in the banking system is forcing overnight rates in the market to trade below the Standing Deposit Facility (SDF), which the central bank wants to align it with the repo rate. The RBI last month had taken the views of market participants last month on measures to align both rates.

Usually, market participants said call money rates should be lower compared to the repo rate, but excessively lower rates can lead to inflation. This is because a surplus of cheaper funds leads to higher spending, which in turn feeds inflation.

Even though there are no concerns on the price-rise front right now, the prevailing geopolitical tensions, along with cheaper funds, may have an impact on inflation, forcing the RBI to reassess the projection made earlier, experts added.