RBI’s three-day VRRR auction too falls short

Mumbai: The Reserve Bank of India‘s (RBI) liquidity draining operation saw muted response from banks, leading to under-subscription in the second such auction in a row. The three-day variable rate reverse repo (VRRR) auction was undersubscribed despite evident lender preference over the longer, seven-day exercise.

Against the notified amount of ₹1 lakh crore, the central bank received bids worth only ₹57,450 crore, which was accepted by the RBI. The cut-off and weighted average rate both came in at 5.49%. The previous week’s seven-day VRRR was also unsubscribed.

Bank treasury officials said that the RBI’s intent behind conducting the three-day VRRR seems to be more toward keeping overnight rates within the liquidity adjustment facility (LAF) than draining out excess liquidity. VRRR does not permanently remove liquidity, but increases cost of liquidity, thus pushing up overnight rates.

Currently, the banking system is in a liquidity surplus of ₹2.6 lakh crore, while the RBI’s stated objective is to maintain surplus around 1% of NDTL, i.e., approximately ₹2.5 lakh crore. A banking system surplus is crucial for faster transmission of policy rate action. So far this year, the benchmark repo rates have slid one percentage point.

“Of the surplus, ₹1-1.1 lakh crore was available for the VRRR auction. However, banks may be reluctant to park the full amount with the RBI, as rates have already moved above the standing deposit facility (SDF) rate. The likely intent of the VRRR is to lift overnight rates, which had softened on Monday. If overnight rates continue to remain below the LAF corridor, an announcement of an overnight VRRR cannot be ruled out,” said V RC Reddy, head of treasury, Karur Vysya Bank.