MUMBAI: In a role reversal, the Reserve Bank of India (RBI) announced on Tuesday a variable rate reverse repo (VRRR) auction, a measure through which the regulator sucks out excess liquidity from the system.
In a release, the apex bank said it will conduct a seven-day VRRR of Rs 1 lakh crore from 10-10.30 am on Friday — the first time in seven months.
The banking system has had a liquidity surplus for quite some time now. On June 13, the system liquidity peaked at Rs 3.62 lakh crore, the highest in three years. The liquidity surplus averaged Rs 2.76 lakh crore in the month of June. Since January, the RBI has injected Rs 9.5 lakh crore into the banking system, which improved the system liquidity from a deficit.
In VRRR auctions, banks deposit surplus funds with the apex bank. The interest rate is determined by competitive bidding, which is usually close to or above the reverse repo rate.
“VRRR will stabilise the short-term rates near the repo rate, as the RBI does not want rates to go below SDF (standing deposit facility) rate,” said Gopal Tripathi, head of treasury, Jana Small Finance Bank.
The inter-bank call rate averaged 5.17% in June, sharply away from the central bank’s SDF rate of 5.25% after the cumulative rate cut of 100 basis points starting February this year.
“If the short-term falls too much, participants tend to borrow more from the short-term market and lend long term or unsecured loans. Any sustained reliance on short-term cheap financing distorts financial stability. And that is one of the reasons that they (RBI) are trying to adjust things for the short-term,” said Soumyajit Niyogi, director, India Ratings & Research.
This reduced credit growth has resulted in less demand for the funds, pushing down the money market rates even with outflows from advance tax, which commenced on June 16, said a treasury official with a private bank. The credit growth fell to a three-year low to 8.97% as on May 30.
In response to the RBI’s action, the short-tenure papers will also likely open 5-10 basis points higher, said market participants.
The RBI’s VRRR will happen in the backdrop of its decision to announce a 100-basis-point cut in the cash reserve ratio to 3% from September till December in four tranches. This will inject Rs 2.5 lakh crore of durable liquidity into the system.
The apex bank said that it will not conduct 14-day main operation on Friday. It conducted 14-day VRR last time on May 2, where it received a poor response at Rs 149 crore against the notified amount of Rs 25,000 crore.
Since January, the RBI had been actively conducting daily and longer-tenor VRR auctions to inject short-term liquidity, responding to a period of tightness caused by tax outflows and heavy forex interventions to stop the rupee from sliding.
Source: The Financial Express
