The Reserve Bank of India received strong demand at the variable rate reverse repo (VRRR) auctions on Thursday, with cumulative bids amounting to Rs 1.91 trillion against the total notified amount of Rs 1.5 trillion.
The central bank conducted two overnight auctions and plans to conduct another three-day VRRR auction worth Rs 1.5 trillion on Friday.
Market participants said the strong demand was driven by overnight rates being lower than the weighted average rate offered by the RBI at the VRRR auction. Banks parked the notified amount at a weighted average rate of 5.24 per cent.
The weighted average call rate (WACR) — which is the operating target of monetary policy — settled at 5.17 per cent, against the previous close of 5.15 per cent.
“The demand was strong because overnight rates have fallen due to the surplus liquidity and the rate offered by the RBI is higher. Naturally banks chose to park their fund there,” said a money market dealer at a state-owned bank.
The central bank conducted the auction in order to absorb surplus liquidity from the banking system and keep overnight rates aligned with the policy rate, said market participants. The policy repo rate currently stands at 5.25 per cent.
Net liquidity in the banking system was in a surplus of Rs 3.70 trillion on Wednesday, the latest data from the RBI showed.
The overnight tri-party repo rate had slipped below the Standing Deposit Facility (SDF) rate of 5 per cent. It rose on Thursday to settle at 5.06 per cent, against the previous close of 4.96 per cent.
“The TREPS rate had fallen below 5 per cent. The RBI wants overnight rates to remain around the repo rate,” said a dealer at a private bank.
A VRRR auction is a liquidity absorption tool through which the RBI temporarily absorbs surplus funds from banks.
