Banks bid 2.5x against Rs 1.75 trn at VRR auction

Banks submitted bids amounting to Rs 4.75 trillion, around 2.5 times of the notified amount of Rs 1.75 trillion, at the Variable Rate Reverse Repo (VRR) auction conducted by the Reserve Bank of India (RBI) on December 22, a day after the liquidity deficit in the banking system widened to Rs 2.5 trillion.

In the most recent VRR auction held by the RBI on December 15, bids totaling 2.7 times the notified amount were received.

Banks secured Rs 1 trillion at a weighted average rate of 6.63 per cent.

This VRR auction marked the central bank’s return to such auctions after a six-month hiatus, with the previous one held on June 19.

However, market participants do not expect additional VRR auctions from the central bank as the VRR amount is scheduled to mature on December 29.

Consequently, the likelihood of the RBI opting to roll over the VRR amount appears low, market participants said.

“The liquidity deficit has almost crossed Rs 2.5 trillion.

"So, obviously, there was good demand from banks.

"We do not expect more VRR auctions because the current VRR amount will mature on December 29, and government spending should start from Monday,” said V R C Reddy, head of treasury at Karur Vysya Bank.

“The liquidity deficit might narrow to below Rs 1 trillion in the first week of January, and may again touch Rs 2 trillion after the outflows start from January 15,” he added.

The liquidity deficit in the banking system widened to more than Rs 2 trillion on Monday on the back of advance tax outflows, it further widened to Rs 2.3 trillion on the back of GST outflows, market participants said.

Liquidity has remained largely in deficit mode in the current quarter.

The market speculated a total of around Rs 4 trillion worth of outflows because of advanced tax and GST payments in December.

“At any rate, we can expect stringent liquidity conditions with credit growth being higher than deposits and the RBI following its stance of withdrawal of accommodation.

"It will be interesting to see if there is any OMO purchase, as that can inject permanent funds into the system.

"No mention was made in the policy, however, of this tool being used. Interestingly there is still around Rs 50,000 crore going into SDF, reflecting surpluses with some banks,” said Madan Sabnavis, chief economist at Bank of Baroda.

RBI Governor Shaktikanta Das said at the post-monetary policy conference that the need to undertake an auction of open market operations (OMO) sales has not arisen so far.

He, however, also said that the OMO tool is not off the table.

“The RBI has been cautious nowadays about over-tightening of the liquidity.

"The liquidity should ease from here.

"It might ease to Rs 1.5 trillion by the end of December, and further the liquidity deficit might narrow to below Rs 1 trillion in January,” a dealer at a primary
dealership said.