The Reserve Bank of India (RBI) has kicked off liquidity management operations in the new financial year by conducting four variable rate reverse repo (VRRR) auctions — two each on April 2 and April 3 — to suck out surplus liquidity from the banking system and reinforce its “withdrawal of accommodation” monetary policy stance.

Banking system liquidity has turned into a surplus due to March month-end spending by the government. The liquidity surplus was at ₹1.47 lakh crore as of April 2.

At the first two-day VRRR auction of ₹1.25-lakh crore on Wednesday (April 3), the RBI got a lukewarm response, with banks deploying only ₹2,015 crore. The central bank accepted the funds at a weighted average rate (WAR) of 6.49 per cent.

At the second two-day VRRR auction of ₹1.25-lakh crore, the RBI got a relatively better response, with banks placing funds amounting to ₹22,365 crore. The central bank accepted the funds at a WAR of 6.49 per cent.

At the first three-day VRRR auction of ₹1-lakh crore conducted on Tuesday (April 2), RBI received and accepted funds from banks amounting to ₹32,105 crore at a WAR of 6.49 per cent.

At the second three-day VRRR auction of ₹50,000 crore, RBI received and accepted funds from banks amounting to ₹21,325 crore at a WAR of 6.49 per cent.

Liquidity management

Rahul Bajoria, Managing Director and Senior Regional Economist, Asia-Pacific, Barclays Investment Bank, observed that the RBI’s liquidity management has been more active since the February monetary policy committee (MPC) meeting, with multiple interventions on both sides (that is, liquidity withdrawals and injections).

He opined that the RBI’s interventions are aimed at managing liquidity conditions to gradually align the weighted average call rate (WACR) (the operating target of monetary policy), which was earlier skirting the upper end of the rate corridor (6.75 per cent), with the repo rate (6.50 per cent).

“Apart from the LAF (liquidity adjustment facility) measures, autonomous factors such as residual government spending towards fiscal year end and the maturity of the RBI’s $5 billion sell-buy swaps have also injected rupee liquidity.

“Thus, system liquidity conditions have eased since the last MPC meeting. With durable liquidity also in surplus, we expect the policy stance to remain “withdrawal of accommodation” in the April MPC meeting,” Bajoria said.

CareEdge Ratings, in a report, noted that RBI has been conducting both variable rate repo (VRR) and VRRR auctions to manage liquidity, in line with its withdrawal of accommodation stance while also meeting the credit needs of the economy.

Meanwhile, the central bank will be conducting an overnight VRRR auction for ₹1-lakh crore on Thursday.