The seven-day variable rate reverse repo (VRRR) auction on Friday received a good response with a subscription of Rs 2.08 lakh crore. This was in contrast to the tepid response to the other recent VRRR auctions. The Reserve Bank of India (RBI) accepted a sum of Rs 2 lakh crore from banks at a cut-off rate of 5.49%.
Ample liquidity despite GST-related outflows
While some outflows are expected in the next week on account of upcoming GST payments, the liquidity levels in the system remain reasonably high. As the treasury head of a leading bank pointed out, “There is ample liquidity in the system. It is more than Rs 3 lakh crore despite the many VRRR auctions.”
On Thursday, the liquidity surplus in the banking system was Rs 3.09 lakh crore compared to Rs 3.11 lakh crore on July 16 and Rs 4.25 lakh crore on July 4.
A dealer at a state-owned bank observed that banks may have subscribed to the VRRR, hoping to manage the outflows on account of taxes by borrowing from the Tri-Party Repo Dealing and Settlement System (TREPS), at lower rates. “However, the rates in the TREPS system have gone up somewhat,” he said. The tri-party repo rate rose to 5.43% before settling at 5.31% on Friday. The weighted average call rate, whereas, was unchanged at 5.35%.
Recent VRRR trends and RBI’s monetary strategy
Previous auctions, in recent weeks, have met with lukewarm response, including those for a shorter tenure of three days. The three-day auction held on July 15 received bids worth Rs 57,450 crore against the notified amount of Rs 1 lakh crore. The central bank’s two-day VRRR auction held on July 9 had also received a lower-than-expected response from participants, where they bid for an amount of Rs 97,315 crore against the notified amount of Rs 1 lakh crore. The cut-off rate was 5.49%, while the weighted average rate was 5.46%. A seven-day auction held on July 4 for an amount of Rs 1 lakh crore, however, was heavily over-subscribed to the extent of Rs 1.70 lakh crore while the cut-off rate was 5.47%.
The RBI has been conducting VRRR auctions since June end to align the call rate with the repo rate. In a recent interview with a news channel, RBI governor Sanjay Malhotra said the central bank wants to align the call rate to align with the repo rate and that the VRRR has helped. “Our effort will be to maintain it (call rate) as close as possible to the policy rate, which should also help us in the transmission,” the governor said.