A day after the weighted average call rate (WACR) went above the repo rate (5.50%) for the first time in the current financial year, the Reserve Bank of India’s (RBI) two-day variable rate repo auction on Wednesday to inject short-term liquidity saw significant response from banks.
High cut off
The participants bid Rs 71,902 crore against the notified amount of Rs 50,000 crore. The central bank accepted the notified quantum at a cut-off rate of 5.53%. The weighted average rate was 5.58%. The cut-off rate was high due to increased demand for funds, said money market traders. The outflows during the month have been mainly due to quarter-end tax payouts.
The WACR, however, continued to rise and ended at 5.73% on Wednesday. During the day, it went to a high of 5.85% — above the Marginal Standing Facility (MSF) at 5.75%. The tri-party repo rate (TREPs) closed at 5.72% compared to the previous close of 5.69%.
VRR
“The VRR represents the neutral stance of the RBI and their assertion that they will operate on both sides of the liquidity management. It should boost market confidence that RBI will not let liquidity stress built up in the market,” said Alok Singh, head of treasury, CSB Bank.
Another dealer added that the RBI will not be comfortable with the overnight rates surpassing MSF rates, as it wants the rates to be within the LAF (Liquidity Adjustment Facility) corridor. He added that high overnight rates will negatively impact the transmission of policy rate cuts.
Following the tax outflows, the system liquidity surplus came down to Rs 2.42 lakh crore on Tuesday from Rs 3.04 lakh crore on July 20. The liquidity was as high as Rs 4.25 lakh crore on July 4.
“The banks do not have enough funds with them to manage tax outflows and they were borrowing from TREPs and call markets heavily during the day, pushing up the rates. They parked a huge surplus of Rs 2 lakh crore at RBI’s VRRR. The lenders also need to manage their day-to-day operations with the liquidity left with them,” said the dealer. The banks rolled over earlier VRRR auctions and parked Rs 2 lakh crore with the RBI on July 18, expecting to manage tax outflows by borrowing from TREPs.
The call rate, the operating target of the monetary policy, was trading at the lower end of the liquidity adjustment facility earlier due to massive liquidity surplus in the system and weak credit offtake. The RBI has been conducting VRRR auctions since June-end to align the call rate with the repo rate. RBI governor Sanjay Malhotra recently said that the central bank wants to align the call rate to align with the repo rate and that the VRRR has helped.