RBI holds overnight VRRR auction to suck out banking system liquidity

The Reserve Bank of India (RBI) on Thursday conducted an overnight variable rate reverse repo (VRRR) auction as banking system liquidity improved owing to government spending.

The weighted average money market rate fell to 6.32 per cent, dealers said.

Banks parked Rs 39,670 crore against a notified amount of Rs 50,000 crore at a weighted average rate of 6.48 per cent.

Surplus liquidity in the banking system stood at Rs 13,377 crore on Wednesday against Rs 4,356 crore on Tuesday, according to the latest data by the central bank.

“Apart from government spending, liquidity improved because of the Rs 40,000 crore that came into the system via the dollar/rupee swap that the RBI did not roll over,” said a dealer at a large state-owned bank.

The RBI’s $5 billion dollar-rupee sell/buy swap matured on Monday, and the central bank opted not to roll it over and instead took delivery, with the goal of fortifying both foreign exchange reserves and rupee liquidity.

In March 2022, the central bank had engaged in a $5 billion sell/buy swap, selling dollars while agreeing to repurchase the same amount at the swap’s end. This move aimed to extend the maturity profile of the forwards book and streamline receivables tied to forward assets. As the swap approaches maturity, the RBI faces a decision to either accept delivery of the forward dollars or initiate a new swap.

However, market participants are speculating that liquidity might again fall into deficit, given the advanced tax payments. Outflows worth around Rs 2 trillion are expected until March 31 on the back of advance tax payments, said market participants.

“The RBI wants to keep liquidity tight because of inflationary fears. I don’t believe liquidity will improve from here,” a dealer at a state-owned bank said. “We have advanced tax outflow from tomorrow (Friday), and along with the VRRR auction, liquidity should fall back to deficit from tomorrow (Friday),” he added.

The retail inflation rate fell to 5.09 per cent in February, changing little from 5.10 per cent in January. While the core inflation rate fell to a near 12-year low, the rise in the food inflation rate exerted upward pressure on the headline inflation rate.

The food inflation rate for February stood at 8.66 per cent against 8.30 per cent in January. The vegetable inflation rate surged to 30.25 per cent from 27.03 per cent in January.

Reserve Bank of India Governor Shaktikanta Das had elaborated on liquidity in his monetary policy statement, ascribing it to external factors and expecting it to correct itself in the foreseeable future, bolstered by market intervention by the central bank.

The RBI, he said, is agile and adaptable in its liquidity management, employing both repo and reverse repo operations. He said the RBI would utilise a judicious mix of instruments to regulate both short-term and long-term liquidity, ensuring that money market interest rates evolved systematically while upholding financial stability.