Reserve Bank of India's VRRR Auction

The recent seven-day Variable Rate Reverse Repo (VRRR) auction by the Reserve Bank of India (RBI) revealed lesser demand than anticipated, with banks showing reluctance due to upcoming financial obligations.

Key Details of the Auction

• The auction amount was set at ₹2.5 trillion, exceeding market expectations of ₹2 trillion.
• Total bids received amounted to ₹1.51 trillion, falling short of the notified amount.

Reasons for Low Participation

• Banks preferred retaining funds due to impending Goods and Services Tax (GST) outflows.
• Reluctance to lock in funds for a seven-day period.

Liquidity and Market Conditions

• Net liquidity in the banking system was a surplus of ₹3.15 trillion as of Thursday.
• The Weighted Average Call Rate (WACR) was trading at 5.47%, close to the repo rate of 5.5%.
• The RBI aims to keep overnight rates within a corridor of 5.25% to 5.5%.

Market Expectations and VRRR Operations

• With WACR aligning closely with the policy repo rate, the necessity for further VRRR operations seems limited.
• No additional VRRR auctions are expected until the following Friday to avoid liquidity drainage during tax outflows.

The VRRR operations by RBI are targeted at absorbing excess liquidity and maintaining short-term rates close to the policy repo rate.