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The Reserve Bank of India on Tuesday conducted two overnight Variable Rate Reverse Repo auctions in a single day, marking the first instance of such action, to reduce liquidity from the banking system which has been largely in deficit mode for the past four months. Market participants said that the central bank conducted the second VRRR auction because they were aware of the funds being released to the banks during the day.
The central bank will conduct another overnight VRRR auction of Rs 50,000 crore on Wednesday.
The first auction received tepid demand where banks parked Rs 27,538 crore against a notified amount of Rs 75,000 crore. However, the second auction received good demand with banks parking Rs 41,804 crore against the notified amount of Rs 50,000 crore. Banks parked the funds at a weighted average rate of 6.49 per cent.
“The second auction was announced because the RBI must be aware that banks might be receiving funds during the day,” said a dealer at a state-owned bank.
The liquidity deficit in the banking system stood at Rs 1.21 trillion on Monday, according to data by the Reserve Bank. The liquidity deficit had widened to a record Rs 3.46 trillion on January 24 on the back of tax outflows.
The liquidity deficit is expected to remain below Rs 1.5 trillion during the week, said market participants.
“The liquidity might widen again once the tax outflows start from next week,” said a dealer at a private bank. “The government is hoarding around Rs 4 trillion, which may be spent by the end of March. Until then, the liquidity will remain like this,” he added.
The market was puzzled when the RBI announced the VRRR auction on Friday. The central bank has been conducting VRRR auctions because the overnight money market rates fell below the repo rate, said market participants. The repo rate currently stands at 6.50 per cent.
The central bank was conducting VRR auctions continuously since December 15 to infuse liquidity into the system. This also gave way to numerous speculations, and the market started factoring in a stance change by the Monetary Policy Committee at the meeting starting Tuesday. The outcome of the meeting will be announced on Thursday.
“The market was expecting that they might announce some instrument for liquidity easing at the MPC, however, that speculation has faded. They seem comfortable with deficit liquidity in the system,” said a dealer at another state-owned bank.
The domestic rate-setting panel is expected to maintain a status quo for the sixth consecutive policy review. Meanwhile, the market was divided on the stance. A segment of the market believed that lower borrowing for the financial year 2024-25 gives room to the central bank to ease monetary policy. The other segment expects the MPC to continue the withdrawal of the accommodation stance.
First Published: Feb 06 2024 | 7:50 PM IST
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