RBI increases 14-day VRRR amount in December to shift out of overnight auctions

The central bank reiterated that it is committed to undertake Operation Twists (OT) and regular open market operations (OMOs) as may be required for effective monetary transmission and anchoring yields.

Given demand for credit remains subdued, loan rates on products like home loans could stay low in a competitive environment.
Given demand for credit remains subdued, loan rates on products like home loans could stay low in a competitive environment.

By Manish Suvarna

The Reserve Bank of India (RBI) has increased the amount of variable rate reverse repo (VRRR) auctions in December, as it is shifting out of the fixed-rate overnight reverse repo auction and re-establishing VRRR as the main liquidity management operations. The amount under the 14-day VRRR auctions on a fortnightly basis has been increased to Rs 6.5 lakh crore for December 17 and further to Rs 7.5 lakh crore for December 31. While from January 2022 onwards, liquidity absorption will be undertaken mainly through the auction route.

“The Reserve Bank will continue to rebalance liquidity conditions in a non-disruptive manner, while maintaining adequate liquidity to meet the needs of the productive sectors of the economy,” RBI Governor Shaktikanta Das said in a policy note.

He also said that the operations of 14-day VRRR would continue to be complemented by longer-term VRRRs, the size and maturities of which will be decided based on continuous assessment. The size and amount of liquidity fine-tuning operations will be increased as and when required.

Since October’s policy statement, RBI has undertaken 14-day VRRR auctions on a fortnightly basis and it had planned to withdraw liquidity worth Rs 4 lakh crore on October 8, post which the amount has increased by Rs 50,000 crore in every auction till December 3. The central bank reiterated that it is committed to undertake Operation Twists (OT) and regular open market operations (OMOs) as may be required for effective monetary transmission and anchoring yields.

Market participants expect the heavy liquidity withdrawal from the system will pull overnight rates near to repo rate, this would mean that accrual returns on a very short-term, low market risk products like overnight and liquid funds could rise in the coming months. “Investors should expect that interest rates on both deposits rates and lending rates will rise in the coming year, albeit gradually,” said Pankaj Pathak, fund manager, Fixed Income at Quantum Asset Management.

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