By Christina Titus
The three-day variable rate reverse repo (VRRR) auction, conducted by the Reserve Bank on Tuesday for an amount of Rs 1 lakh crore, saw a tepid response, with bids coming in for Rs 57,450 crore. The central bank accepted all the bids at a cut-off rate of 5.49%.
The lower-than-anticipated response was attributed partly to the slightly-lower liquidity surplus in the system. Liquidity in the banking system came down to Rs 2.61 lakh crore on Monday, from Rs 2.94 lakh crore on Sunday. It stood at Rs 4.25 lakh crore on July 4.
At the seven-day auction, held on July 11, the RBI had received bids worth Rs 1.52 lakh crore, below the notified amount of Rs 2.5 lakh crore, and had fixed the cut-off rate at 5.49%. The central bank has been conducting VRRR auctions since June-end with a view to aligning the overnight call money rate with the repo rate, which is currently at 5.5%.
Following the auction, the weighted call money rate hardened at 5.38% on Tuesday, up from Monday’s close of 5.31%. The call rate had been trading below the lower end of the liquidity adjustment facility (LAF) due to excessive liquidity in the system and a weak credit growth.
Market participants also attributed the lukewarm response to Tuesday’s VRRR to the start of the reporting fortnight. “Since banks need to maintain a balance, they do not want to park an excess amount with RBI,” said the treasury head at a private bank. Typically, banks maintain high cash reserve balances with the RBI at the start of the fortnight.
In an interview to a news channel on Tuesday, RBI governor Sanjay Malhotra reiterated that the operating target of the monetary policy is the call money rate. “The target for us is certainly the call money rate. It has to be within the corridor. We would like the call rate to be at the policy rate…. VRRR has brought up the call money market rate. In the morning, it was 5.44%, which is quite close (to repo rate),” Malhotra observed.
The governor also said “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 central bank will likely release the liquidity management framework by the end of the month, he said, indicating that there are no major changes. “We are trying to increase volumes in the call money market. We extended the timings for the markets. We’ll see how we can further improve the market,” the governor said.