The Reserve Bank of India (RBI) on Wednesday infused Rs 72,300 crore of transient liquidity into the banking system through two Variable Rate Repo (VRR) auctions, as the surplus liquidity narrowed significantly following advance tax payments.
Details of the VRR Auctions
In the first auction, the central bank injected Rs 50,016 crore through a two-day VRR auction at a cut-off rate of 5.26 per cent. A second two-day VRR auction infused an additional Rs 22,284 crore. Variable rate repo auctions are a key tool used by the RBI to manage liquidity mismatches in the banking system.
Liquidity Surplus Narrows
According to RBI data, the liquidity surplus in the banking system stood at approximately Rs 23,881.21 crore as of June 16, a sharp decline from the surplus of around Rs 1.51 lakh crore recorded on June 15. Experts attribute this narrowing to outflows resulting from advance tax payments.
V Ramachandra Reddy, head of treasury at The Karur Vysya Bank, said, “Considering the narrowing of surplus liquidity in the banking system and expectation of further outflows on account of goods and services tax payment, the central bank may conduct more variable rate repo auctions to support liquidity and keep overnight rates under check.”
Impact on Overnight Rates
In recent days, overnight rates have been trading above the RBI’s repo rate due to the strain on liquidity surplus, prompting the central bank’s intervention to infuse transient liquidity. On Wednesday, the weighted average call money rate was trading at 5.37 per cent, which is 0.12 per cent higher than the repo rate, while the Treps rate stood at 5.21 per cent.
Market participants expect the RBI to conduct further VRR auctions in the coming days to support liquidity, especially with additional outflows anticipated due to GST payments.
