RBI to conduct daily variable rate repo auctions to infuse liquidity
Mumbai, Jan 15, 2025
The Reserve Bank of India (RBI) announced it will conduct daily variable rate repo (VRR) auctions on all working days in Mumbai until further notice. This marks the first time the central bank has introduced daily auctions.
The auctions, designed to address liquidity tightness in the banking system, will commence on Friday with a notified amount of Rs 50,000 crore.
Liquidity deficit in the banking system has surpassed Rs 2 trillion in recent days. On Tuesday, the deficit stood at Rs 2.09 trillion, down from Rs 2.5 trillion on Monday. The situation is expected to worsen with Goods and Services Tax (GST) outflows later this month.
“After reviewing current and evolving liquidity conditions, it has been decided to conduct VRR auctions on all working days in Mumbai, with reversal taking place on the next working day until further notice,” the RBI stated on Thursday.
As per the revised liquidity framework introduced on February 6, 2020, the 14-day variable-rate repo/reverse repo auction is the primary liquidity operation, while overnight and up to 13-day auctions are classified as fine-tuning operations.
The daily auctions will reverse on the next working day, except for those conducted on Fridays, where the reversal will occur on the following Monday or the next working day if Monday is a holiday in Mumbai. The auctions will be held between 10:00 AM and 10:30 AM, with the notified amount determined by the RBI based on its liquidity assessment. The auction details will be announced on the RBI's official website.
This measure aims to ensure stable liquidity conditions in the banking system, according to market participants. Eligible entities, including standalone primary dealers, can participate in these auctions.
"Given the current liquidity conditions, participants are likely to bid at the higher end of the band, implying slightly higher borrowing costs. However, this offers significant relief, especially with GST outflows approaching and the tight liquidity situation," said Anshul Chandak, head of treasury at RBL Bank.
“While this initiative helps in the short term, addressing durable liquidity might require more substantial measures, possibly at the upcoming policy meeting,” Chandak added.
In the five-day VRR auction conducted on Wednesday, banks bid Rs 3,980 crore against the notified amount of Rs 75,000 crore. Banks perceived it as a temporary intervention aimed at addressing short-term liquidity needs.
“This will create a sense of assured liquidity as the amount will roll over daily. People will likely take it positively,” said a senior executive at a primary dealership. “Core liquidity is in a negative of nearly Rs 1 trillion, and the overall system deficit is around Rs 3 trillion, which is expected to remain tight until the end of March,” the executive added.
[The Business Standard]
