Market participants expect the central bank to continue with VRR auctions as the liquidity shortage is expected to further widen due to fiscal outflows
The Reserve Bank of India on Monday held two four-day floating rate repo auctions (VRR) to provide liquidity to the banking system as the overall liquidity shortfall neared Rs 2 trillion.
The liquidity deficit in the system widened to Rs 1.96 trillion on Sunday.
The central bank held two VRR auctions in one day for the first time on Friday, after six fine-tuning variable rate reverse repo (VRRR) auctions between February 2 and February 7. This included two one-day VRRR auctions on February 6 and February 7.
“Because of the high demand at the first auction, they might have come up with the second auction,” said a trader at a state-owned bank. “We cannot find out the exact reason why they are holding two auctions. They could have raised a larger amount in one auction,” he added.
In the first four-day VRR auction, the Reserve Bank of India received bids worth Rs 1.23 trillion, against a reported amount of Rs 25,000 crore. The second auction received bids worth Rs 97,280 crore.
Market participants expect the central bank to continue with VRR auctions as the liquidity shortage is expected to widen further due to fiscal outflows.
“They should continue with the VRR for at least the month of February,” said a dealer at a state-owned bank. “From March onwards, government spending will provide liquidity,” he added.
Reserve Bank of India Governor Shaktikanta Das had elaborated on liquidity conditions in his monetary policy statement and attributed them to external factors. These were expected to recover in the near future, supported by market interventions by the central bank.
The Reserve Bank of India, he said, is agile and adaptable in its liquidity management and uses both repo and reverse repo operations. He said the Reserve Bank of India would use a judicious mix of instruments to regulate liquidity in both the short and long term to ensure that money market rates move systematically while maintaining financial stability.
First print: February 12, 2024 | 7:02 PM IST