Mumbai, February 11 The Reserve Bank of India (RBI) is likely to announce a short-term variable rate reverse repo (VRRR) auction in the coming days to absorb excess liquidity from the banking system and bring the overnight call money rate closer to the policy repo rate, experts said on Wednesday.
Over the past few weeks, surplus liquidity in the system has remained high, and banks have parked as much as Rs 4.78 lakh crore under the Standing Deposit Facility (SDF) on Tuesday, which reflects limited credit demand and robust government spending, according to market experts and an economist who spoke to PTI.
The persistent surplus has put pressure on overnight money market rates, which have often traded below the repo rate, and this may prompt the central bank to consider active liquidity management measures.
"As liquidity moves into a surplus of over Rs 3 lakh, the volume of SDF reached Rs 5 lakh crore last week, and the weighted average call rate hovers around 0.25 per cent below the repo rate, the RBI may consider fine-tuning the VRRR as a short-term measure to align the overnight rates near the repo rate," said Mataprasad Pandey, Vice-President at Arete Capital Service.
Similarly, Gaura Sengupta, an economist at IDFC First Bank, also said that the RBI may announce VRRR auctions because the weighted average call rate has persisted below the repo rate.
"The focus on liquidity management is to align the weighted average call rate with the repo rate. In February, for half of the month, the Weighted Average Call Money (WACR) rate has been below the repo rate, so we expect VRRR to be announced," she said.
So far in February, the overnight call money rate remained as much as 0.54 per cent below the repo rate, according to RBI data. This is due to persistent higher liquidity in the banking system.
Systemic liquidity has turned sharply positive after liquidity injection measures such as open market operations (OMO) purchases of government securities and USD/INR buy/sell swap auctions conducted by the RBI in the past few months.
These liquidity measures not only helped the central bank to bring down the overnight money market rates, but also helped better transmit the 1.25 per cent policy rate cut done since last year.
According to RBI data, the central bank has infused Rs 2.5 lakh crore through OMO purchases of government securities so far since the beginning of this calendar year.
Market participants said that conducting shorter-tenure VRRR auctions would enable the RBI to fine-tune liquidity conditions more effectively.
Such operations would not only absorb excess funds but also provide flexibility to inject liquidity when needed, particularly around the Goods and Services Tax (GST) payment cycle on the 20th of every month.
During the GST outflow period, liquidity in the banking system typically tightens temporarily, leading to upward pressure on overnight rates. By calibrating the tenure and size of VRRR operations, the RBI can reverse liquidity absorption swiftly during these periods to prevent undue volatility in money market rates.
"RBI will ensure that VRRR will mature before GST payment," Sengupta said.
