 "RBI conducts two VRRR auctions again to balance liquidity within system")
The Reserve Bank of India on Wednesday conducted two variable rate reverse repo (VRRR) auctions of Rs 50,000 crore each ahead of the Monetary Policy Committee meeting outcome scheduled on Thursday to address the skewed liquidity situation within the banking system, said market participants. The development came a day after the central bank conducted two one-day VRRR auctions for the first time on Tuesday.
Banks bid almost double the notified amount at the first auction, where the central bank received Rs 96, 093 crore bids against the notified amount of Rs 50,000 crore. However, at the second auction banks parked only Rs 11,829 crore at a weighted average rate of 6.49 per cent. The amount of funds parked in the SDF with a significant liquidity deficit suggests an imbalanced distribution of liquidity within the banking system, said the market participants.
Meanwhile, the liquidity deficit within the system continues to narrow on the back of government spending, even though the central bank has been sucking out liquidity via these auctions. The liquidity deficit stood at Rs 1 trillion on Tuesday. It had widened to record Rs 3.46 trillion on January 24 on the back of tax outflows.
“They don’t want money to go into the SDF. Yesterday the response was better for the second auction because apparently there was some query by the RBI on why banks are preferring to park money in SDF at a lower rate. They are sucking liquidity also because they don’t want yields to soften in order to reiterate that the fight against inflation is still on,” said treasury at a private bank.
The central bank conducted a VRRR auction on Friday, marking its first in two months, prompted by money market rates dipping below the repo rate, which persists below that benchmark. Notably, the weighted average call rate registered at 6.48 per cent on Wednesday, slightly under the current repo rate of 6.50 per cent.
Market participants now eye the monetary policy committee meeting outcome for further guidance around the current liquidity situation. A segment of the market remains optimistic that the domestic rate-setting panel might change its stance to neutral given that they allowed the money market rates to ease.
“Around 20 per cent-30 per cent of the market still believes that stance will change as earlier they were keeping the money market rates to be around 6.75per cent, that is, around the MSF, and now we can see that they have fallen below the repo rate,” said a dealer at a primary dealership. “They conducted VRR auctions which led to liquidity ease, hence the fall in rate,” he added.