Business Standard

Short-term rates decline amid strong VRR demand

RBI receives bids worth ~1.52 trillion, against ~1 trillion notified amount


The Reserve Bank of India (RBI) on Tuesday received bids worth ~1.52 trillion against a notified amount of ~1 trillion at the overnight variable rate repo (VRR) auction.

The central bank allotted ~1 trillion at a weighted average rate of 6.73 per cent.

Liquidity deficit in the banking system widened to ~1.22 trillion on Monday, according to the latest data by the RBI. There has been a huge demand at the VRR auctions conducted by the RBI amid liquidity fluctuatio­ns in the banking system.

Weighted average money market rates fell to 6.66 per cent on Tuesday, against 6.77 per cent on Friday.

The central bank had conducted three VRR auctions on Friday to ease liquidity tightness in the banking system.

Given the liquidity tightness, weighted average money market rates had risen above the marginal standing facility (MSF) rate.

Meanwhile, market participan­ts speculate that the liquidity condition may remain in deficit mode in the near term. This is because government borrowings for the financial year 2024-2025 will begin from the first week of April.

Thereby, RBI may continue conducting VRR auctions in order to keep overnight money market rates near the repo rate. The repo rate currently stands at 6.5 per cent.

RBI Governor Shaktikant­a Das had elaborated on the liquidity conditions in his monetary policy statement, ascribing them to external factors. He expects them to rectify in the foreseeabl­e future, bolstered by interventi­ons by the central bank.

He said the RBI is agile and adaptable in its liquidity management, employing both repo and reverse repo operations.

Das added that the RBI will utilise a judicious mix of instrument­s to regulate both shortterm and long-term liquidity.

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