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The Reserve Bank of India (RBI) conducted two back-to-back variable rate reverse repo (VRRR) auctions on Wednesday after a gap of 21 days to suck out liquidity from the banking system and try and push up the overnight market rates.
Banks had net overnight surplus liquidity amounting to ₹83,101 crore, going by the RBI’s money market operations data as of February 27.
“On an average, the government borrows ₹30,000 crore to ₹33,000 crore at the weekly auctions. But the borrowing programme for FY24 ended about two weeks back.
“So, funds, which otherwise would have been deployed in the auctions, are available with banks. Moreover, year-end government spending is also happening, which is adding to the system’s liquidity,” said Gopal Tripathi, Head of Treasury and Capital Markets at Jana Small Finance Bank.
Since the monetary policy stance continues to be “to remain focused on withdrawal of accommodation,” the RBI has absorbed liquidity via VRRR auctions in a bid to push up overnight money market rates above the repo rate of 6.50 per cent, say market experts.
The weighted average rate in the money markets softened 16 basis points to 6.38 per cent on Wednesday from 6.54 per cent on Tuesday, per CCIL data.
In the first VRRR auction, the RBI received offers from banks for deploying funds aggregating ₹20,860 crore for a day against the notified amount of ₹50,000 crore. The central bank absorbed the funds at a weighted average rate (WAR) of 6.48 per cent.
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In the second one-day VRRR auction, banks made offers to park funds aggregating ₹1,337 crore against the notified amount of ₹25,000 crore. The RBI accepted the funds at a WAR of 6.49 per cent.
“Nowadays, banking liquidity depends on how much the government is spending or releasing payments. Accordingly, RBI is doing the fine-tuning operations.
“Excess liquidity is being absorbed through VRRR (to prevent overnight money market rates from going below the standing deposit facility rate of 6.25 per cent) and providing money through VRR (to ensure that rates don’t cross the marginal standing facility rate of 6.75 per cent),” said V Rama Chandra Reddy, Head-Treasury, Karur Vysya Bank.
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