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Home.forex news reportRBI introduces daily VRR operations to boost banking liquidity amidst deficit

RBI introduces daily VRR operations to boost banking liquidity amidst deficit

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The central bank Wednesday prioritized liquidity infusion into the banking system by announcing daily variable rate repo (VRR) operations, which would accompany the up to $3-billion worth of dollar-rupee buy-sell swaps conducted since Friday, as Mint Road seeks to restrain short-term interest rates that otherwise threaten to dislocate India’s money markets.

The first such VRR auction, starting Thursday, will be for Rs 50,000 crore, and the Reserve Bank of India (RBI) will decide on a further auction amount based on the liquidity conditions for that day, the central bank said in a statement Wednesday evening. A reversal of the auction will take place the next day.

The move to hold VRR operations comes as average liquidity in the system is in a deficit of more than Rs 1 lakh crore for two weeks.

The average daily deficit in banking system liquidity through the first fortnight of January stood at Rs 1.45 lakh crore, while on Tuesday alone it was at Rs 2.09 lakh crore, RBI data showed.

Treasury heads, however, believe the VRR operation alone will not help reverse the core liquidity deficit faced by the banking system. However, such operations would align the call rates closer to the current policy repo rate of 6.50%.

“Divergence between call rates and the repo rate is bound to happen when there is perpetual tightness in liquidity, especially during the last quarter of the year, when there is high demand for money,” said Gopal Tripathi, head of treasury, Jana Small Finance Bank. “Daily VRRs will only ease the weighted average call rate (WACR) and not impact liquidity as the transaction will get reversed the next day.” Hence, the RBI will need to inject sizeable, durable liquidity to prevent call rates from spiking, economists said. Furthermore, liquidity in the banking system – or a crunch – would have an impact on credit offtake. The WACR stood at 6.45% on Wednesday, from 6.36% the previous day. Additionally, the Mumbai Interbank Offered Rate (MIBOR), the benchmark for interbank lending, was around 7% last week, having breached the previous high level of 6.85%.

Core liquidity in the banking system turned negative – at Rs 60,000 crore – as of January 10. The RBI also conducted buy-sell swaps of $2-3 billion on Wednesday and Friday last week to ease overall liquidity of the banking system.

“The RBI will also need to infuse durable liquidity given the sharp reduction in core liquidity,” said Gaura Sen Gupta, chief economist at IDFC First Bank.

“The daily VRR auction will be more effective as there is high demand for shorter tenor VRR. The guarantee that a VRR will be conducted at a particular time every day will help reduce volatility in overnight rates,” Sen Gupta said.



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