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Informist, Wednesday, May 28, 2025

 

By Christina Titus

 

MUMBAI – The Reserve Bank of India's daily variable rate repo auction Tuesday received the lowest bids since its inception in January. Banks' participation in the daily liquidity operations has declined drastically, while the scant bids are largely attributed to primary dealerships, according to balance sheet managers and call market dealers. 

 

The central bank received bids worth INR 35.42 billion against the notified amount of INR 250 billion on Tuesday, and the auction subscription has averaged only INR 52.5 billion in May. The subscription at variable repo auctions is on a downtrend after the banking system returned to a liquidity surplus, with a proxy for the surplus averaging INR 1.66 trillion in May. All the daily auctions this month have been of the minimal INR 250-billion size, and the last time an auction received bids above INR 100 billion was on Apr. 30.

 

Primary dealers are the major borrowers at the overnight auction, according to dealers. There are certain limitations for primary dealers to borrow from the overnight money market, such as counter-party exposure and restrictions on pledging certain securities. Additionally, the triparty repo market requires a haircut of up to three times more than the repo auction. This is why primary dealers still approach the overnight auction and borrow at 6.01?spite discounts of up to 35 basis points available in the overnight money market, dealers said.

 

"RBI wants to reassure the market, and it is good that they continue (variable rate repo auction)," a dealer at a primary dealership said. "It is a reassurance that, at any point of time, if there is any spike in rates (overnight money market), people can avail VRR facility and it's because of VRR, rates are anchored and it is not moving above 6%. Or else, rates keep on shooting at times in between 6% as well. So, it makes a lot of sense for RBI to come with VRR on a daily basis."

 

Banks, which have excess statutory liquidity ratio securities on their books, face relatively fewer constraints in tapping even the collateralised overnight market, securing funds at cheaper rates and avoiding borrowing from the RBI. Introduced on Jan. 16, the daily variable rate repos were considered a boon at a time when banking system liquidity and durable liquidity were both in deficit, calming overnight rates to below the Marginal Standing Facility rate. 

 

Asset-liability managers also said the constant overnight operations are helping to better transmit the RBI Monetary Policy Committee's repo rate cuts of 50 bps since February, rather than the 14-day operations that are the main tool of liquidity management since 2020. The central bank seems to have realised the fortnightly operations were not useful in transmitting rate cuts effectively, as it has conducted only one 14-day variable rate repo auction since Mar. 7. A return to overnight liquidity operations, either fixed or variable rate, is one of the key asks from bankers in their discussions with the RBI about a new liquidity management framework. 

 

Speaking after the Monetary Policy Committee's meeting in April, RBI Governor Sanjay Malhotra said the central bank would maintain systemic liquidity in a surplus of 1% of banks' net demand and time liabilities to ensure better transmission of policy rates. In a note Tuesday, Barclays said the current liquidity surplus was consistent with the RBI's intent. The bank's strategists expect further open market operations to buy gilts this year to further infuse durable liquidity, which is seen at nearly INR 5.5 trillion by the end of May. With liquidity so comfortable, the rate in the collateralised triparty repo market, which has the most volume, has dropped below the Standing Deposit Facility rate of 5.75%.

 

"...other platforms wherever we were getting funds, they were at a higher rate. At least up to that time we were getting funds at lower rate (in the variable rate repo auction)," a dealer at a public-sector bank said, speaking about the introduction of the daily auctions. "So I think now that since the subscription is minimum, they are conducting with a minimum level."

 

Some traders have said the time for the daily variable rate repos has passed, with participation expected to remain weak. The daily auction should be done away with or the RBI should downsize the auction to INR 100 billion on a usual basis, rising in times of liquidity strain as required, dealers said. The earliest the auction is seen being given up is at the June monetary policy review next week.

 

However, the majority of market participants said the excess of liquidity available to market participants at the VRR auction is essential to keep overnight rates at current levels. The overnight variable rate repo windows give market participants the confidence to lend cheaply in overnight markets, as they are assured that a large quantum of cash from the RBI is available regularly. Should the daily auctions go away or become ad-hoc as earlier, the risk of overnight rates being anchored to the repo rate instead of the Standing Deposit Facility rate would return, dealers said.  End

 

(With inputs from Aaryan Khanna)

 

Edited by Tanima Banerjee

 

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