The seven-day variable rate repo (VRR) auction is expected to see firm demand from banks as liquidity in the system remains in deficit mode, market participants said.
The Reserve Bank of India (RBI) will conduct a seven-day VRR auction on Friday to inject up to Rs 1 trillion into the banking system, it said in a release on Thursday. The last time the central bank conducted a VRR auction was on June 19 of the current year.
“The response should be good from the banks, and the auction should sail through easily as the liquidity is very tight right now,” a dealer at a state-owned bank said. “The money market rates should also soften after this notification,” he added.
Bankers had been asking the Reserve Bank of India to conduct a VRR operation as the liquidity deficit continued to widen, while borrowing by banks from the Marginal Standing Facility hit new records, market participants said.
“There was a demand from banks for VRR because the call and Treps rate are above the MSF (Marginal Standing Facility) rate, and liquidity is very tight,” a dealer at another state-owned bank said. The weighted average call rate settled at 6.76 per cent on Thursday. The MSF rate currently stands at 6.75 per cent.
The liquidity has remained largely in deficit mode in the current quarter. The Reserve Bank of India infused Rs 38,774 crore on Wednesday. The banking system liquidity widened to a near five-year high on November 21 on the back of monthly goods and services tax payments. The central bank had infused Rs 1.74 trillion on that day.
The RBI has been conducting Variable Rate Reverse Repo auctions for the past six months in order to withdraw excess liquidity from the system. However, banks remained reluctant to participate in the VRRR auctions given the tight liquidity in the system.
First Published: Dec 14 2023 | 6:59 PM IST