The Reserve Bank of India (RBI) may conduct a series of variable rate repo (VRR) auctions for the better part of March, to deal with possible liquidity outflows from the banking system arising from banks participating in a scheduled forex swap, reversal of a forex swap conducted three years back, and enhanced Treasury Bill auctions, among others.

That liquidity could come under pressure is underscored by the fact that RBI is scheduled to conduct a two-year forex swap auction on March 8, 2022, whereby it will sell $5 billion and suck out the equivalent amount of Rupee liquidity amid volatility in the forex market.

Further, on March 28, the buy (USD)-sell (INR) forex swap auction that RBI had conducted in 2019 for $5 billion will get reversed, whereby RBI will sell USD and absorb Rupee liquidity for an equivalent amount.

Moreover, as per the revised calendar for auction of Treasury Bills for March, the Government will be raising ₹60,000 crore more.

So, roughly, around ₹1.30 lakh crore will be sucked out of the banking system in March due to the aforementioned transactions. If one takes into account advance tax outflows, this figure could rise by about ₹1 lakh crore.

While on the one hand liquidity will get sucked out, on the other hand, rupee liquidity could be created due to foreign investors pumping in Dollars for investment in the proposed initial public offer of the Life Insurance Corporation of India and release of ₹4.91 lakh crore absorbed by RBI under the variable rate reverse repo (VRRR) auction on maturity on March 25, 2022.

RK Gurumurthy, Treasurer, Dhanlaxmi Bank, observed that from March 8th onwards, money markets could tighten because there will be advance tax outflows from the system.

“RBI will operationalise Variable Rate Repo (VRR)…..RBI Governor’s February 10th statement had referred to VRRR and VRR. I am quite sure, we will see VRRR and VRR active for the whole of March,” he said.

RBI had last conducted a VRR auction (one-day) on January 24, 2022, at a weighted average rate (WAR) of 4.13 per cent.

Gurumurthy expects the weighted average rate (WAR) of VRRR to go up to 4 per cent before the April 2022 bi-monthly monetary policy from 3.87 per cent as on February 4, 2022 (mentioned by the Governor on February 10th) and WAR of VRR to be at about 4.40 per cent.

“So, arithmetically, they (RBI) don’t need to hike rates. They would have operationalised higher short term rates. We will see lot of VRR auctions in the next four weeks,” he said.

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