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Informist, Friday, Jun. 27, 2025

 

MUMBAI – The Reserve Bank of India's use of variable rate reverse repo to gradually align the weighted average call rate towards repo rate, with liquidity surplus being at 1% of net demand time liabilities, is seen as a trend shift, Union Bank of India said in a report on Thursday. "We believe that the pace of uptick in WACR is likely to be gradual, given the RBI Governor's views on liquidity and transmission and contingent of the quantum of VRRR announced & auction cutoffs," the report said.

 

Before the variable rate reverse repo auction announcement, the weighted average call rate, which is the operating policy target, was trading at or below the Standing Deposit Facility of 5.25% since June Monetary Policy Committee's meeting due to abundant surplus in the system. On an average, the banking system liquidity has been in a surplus of INR 2.73 trillion in the month of June, data from RBI showed. 

 

On Tuesday, the central bank had announced that it would conduct a seven-day variable rate repo auction on Friday for a notified amount of INR 1 trillion. A threshold shift was seen in Wednesday's Treasury bill yield curve with the cut-off yields rising 5-8 basis points higher than the previous week's auction. On Wednesday, the RBI set the cut-off on the 91-day T-bill at 5.41%, for the 182-day T-bill at 5.54% and the 364-day T-bill at 5.57% on Jun. 18. Following this, the short-term borrowing costs for certificates of deposit also rose with the one-year spread rising to 75-80 basis points, the report said.

 

On Friday, the RBI set a cut-off at 5.49% at the seven-day variable rate reverse repo auction while accepting all INR 849.75 billion bids received. Consequently, at 1230 IST, the weighted average call rate was at 5.39%, sharply above from 5.30% at the same time on Thursday. 

 

In the coming months, the state-owned bank sees the liquidity surplus to be comfortable, the report said. As per the latest data from the RBI, the net liquidity absorbed by the central bank--a proxy for systemic liquidity surplus--stood at INR 2.71 trillion on Thursday, up from INR 2.48 trillion Wednesday. 

 

However, key monitorables will be potential pressure on liquidity from foreign exchange interventions amid persistent global volatility, forward maturities and the quantum of variable rate repo auctions used for liquidity management, the bank said.

 

With the likelihood of RBI implementing more such liquidity measures in the coming days, slight flattening of the yield curve led by the shorter-end rising higher is expected, the report said. "In near term, we expect slight flattening of the yield curve primarily led by the shorter end drifting higher," Union Bank said in a report. "This accounts for our baseline view of no further repo rate changes amid geopolitical & monsoon uncertainty, even as we acknowledge an outside chance of 25-50 bps (basis points) rate cut in H2-FY26 if inflation trends way below the MPC's 3.7% projection for FY26." 

 

The state-owned bank is also of the view that extending market hours is likely an attempt by the central bank to improve call money market volumes. RBI on Wednesday said that the trading hours for the call money market will be extended to 1900 IST starting Jul. 1, while the timing for tri-party repo and market repo will be extended to 1600 IST, starting Aug. 1. The call money market timing will be revised to 0900-1900 IST from the current 0900-1700 IST. The trading hours of market repo and tri-party repo will be 0900-1600 IST from August. Currently, the market repo for government securities market closes at 1430 IST and the tri-party market closes at 1500 IST. End

 

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

 

Reported by Siddhi Chauhan

Edited by Deepshikha Bhardwaj

 

 

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