The Reserve Bank of India (RBI) on Wednesday infused ₹72,300 crore of transient liquidity into the banking system through two variable rate repo (VRR) auctions after surplus liquidity narrowed following advance tax payments.
The central bank injected ₹50,016 crore through a two-day VRR auction at a cut-off rate of 5.26 per cent. It infused another ₹22,284 crore through a second two-day VRR auction.
VRR auctions are used by the RBI to manage liquidity mismatches in the banking system. They allow banks to borrow funds from the central bank for a short period, usually against eligible securities, when system liquidity tightens.
Why liquidity narrowed
The move followed a sharp fall in surplus liquidity after advance tax outflows.
Liquidity in the banking system was estimated to be in surplus of around ₹23,881.21 crore as on June 16, compared with around ₹1.51 trillion as on June 15, according to RBI data.
Experts attributed the latest narrowing to advance tax payments. They said the central bank may conduct more VRR auctions in the coming days to support liquidity in the banking system.
“Considering the narrowing of surplus liquidity in the banking system and expectation of further outflows on account of goods and services tax payment, the central bank may conduct more variable rate repo auctions to support liquidity and keep overnight rates under check,” said V Ramachandra Reddy, head of treasury at The Karur Vysya Bank.
Rates above repo
In the last few days, overnight rates have been trading above the RBI’s repo rate because of strain on liquidity surplus, prompting the central bank to intervene.
On Wednesday, weighted average call money rates were trading at 5.37 per cent, which was 0.12 per cent higher than the repo rate. Treps was trading at 5.21 per cent.
The next trigger for liquidity conditions will be GST-related outflows. If those payments further tighten surplus funds, market participants expect the RBI to continue using short-tenor repo operations to keep overnight rates aligned with the policy rate.
(With inputs from agencies)
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