By Christina Titus
The Reserve Bank of India’s variable rate reverse repo (VRRR) auction on Wednesday received lower-than-expected response from participants. Banks bid for Rs 97,315 crore, against the notified amount of Rs 1 lakh crore. The cut-off rate was 5.49%.
The central bank announced two-day auction amounting to Rs 1 lakh crore late on Tuesday. This is the third such operation conducted by the RBI in three weeks. In the previous seven-day auction on July 4, the RBI received bids worth Rs 1.70 lakh crore. However, it accepted Rs 1 lakh crore.
Market participants expected Wednesday’s auction to be oversubscribed.
“Surprisingly, the VRRR auction did not receive bids for the full notified amount, and the cut-off was set at the upper end of the range. I had anticipated a healthier response considering the short tenure would attract more participation. However, the rise in overnight rates on Wednesday appears to have dampened the demand, as the narrowing arbitrage margin likely discouraged banks from locking in funds,” said VRC Reddy, head of treasury, Karur Vysya Bank.
Overnight money market rate inched higher ahead of the auction. The weighted average call rate was at 5.32% compared to the previous close of 5.26%. Tri-party repo rate ended at 5.29%, up from the previous close of 5.13%.
“Banks had already locked in Rs 1 lakh crore with the RBI, and the declining liquidity surplus likely weighed on the participation at the auction,” said a dealer from a public sector bank.
Market participants expect the RBI to continue with VRRR auctions until the liquidity surplus remains above 1% of net demand and time liabilities, or Rs 2.5 lakh crore. The liquidity surplus was at Rs 3.07 lakh crore as of July 8, RBI data showed.