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Informist, Monday, Jul. 14, 2025

NEW DELHI – Bankers expect the Reserve Bank of India to soon introduce daily reverse repo operations to mop up frictional liquidity. This is likely to be preferred by market participants, who held on to cash at the seven-day variable rate reverse repo auction on Friday.

"I think it is pretty clear that the RBI is setting the stage to introduce daily VRRRs, slowly but surely," the head of asset liability management at a private sector bank said. "People are afraid that it could come any day now, which will be used quite freely by banks but then inevitably your call money rates will rise."

The RBI has preferred "fine-tuning" liquidity management operations since January, and has conducted the main 14-day operation under its liquidity management framework only once since March. It had held daily variable rate repo auctions for nearly five months between January and June to help banks deal with tight liquidity conditions.

The central bank could either introduce an on-tap reverse repo window, which was seen as unlikely, or conduct daily VRRR auctions for specified amounts, dealers said. This would bring about more participation and help the RBI have a better handle on its liquidity management, they said. The notified amount at the auction on Friday was larger than the market had expected but was eventually undersubscribed.

The RBI took all offers worth INR 1.52 trillion at the INR-2.50-trillion auction on Friday, though maturing VRRRs injected INR 1.97 trillion of liquidity into the banking system. This was on top of RBI data showing that a proxy for the systemic liquidity surplus was at INR 3.15 trillion on Thursday.

Banks said they avoided offering funds to the central bank because of the reporting Friday, where they have to meet regulatory norms on cash reserves, and due to scheduled outflows for two initial public offerings this week that created some uncertainty on their cashflows. In addition, treasuries have to make strategic decisions for auctions for around a week, but use shorter-term VRRRs as an alternative to the Standing Deposit Facility, dealers said. The weighted average rates at the four liquidity draining auctions that the RBI has held since late June have been set at 5.44-5.49%, against the SDF rate of 5.25%.

On Thursday, funds parked at the SDF fell to the lowest since Apr. 29, at INR 1.25 trillion. This was after the RBI conducted a two-day, INR-1.00-trillion VRRR auction Wednesday, which was nearly fully subscribed despite INR-1-trillion already locked up in a seven-day VRRR. To be sure, it came at a time when a proxy for the banking system liquidity showed a surplus of over INR 3 trillion, well above the 1% of banks' net demand and time liabilities surplus that RBI Governor Sanjay Malhotra said would be appropriate for rate cut transmission.

With the RBI now consistently draining out liquidity and fears of more active intervention after the large auction Friday, overnight money market rates have risen. The benchmark for the call money market – the overnight Mumbai Interbank Offered Rate – was on Friday set above the repo rate for only the second time since Apr. 2. The newly introduced Secured Overnight Rupee Rate, a newly constructed benchmark for collateralised markets, was set at 5.39% Friday, up 10 bps from Thursday.

Still, some sections of the market remain unconvinced the central bank wants to drive up the cost of funds through daily VRRRs at a time when its Monetary Policy Committee has cut the repo rate by 100 basis points to 5.50?tween February and June. Should these auctions become more short term, the weighted average call rate – the operating target of monetary policy – will likely be aligned to the repo rate, dealers said, as envisioned by external MPC member Ram Singh.

"There is no clarity what the RBI wants to do and what rates it is targetting," a treasury official at a state-owned bank said. "At such a time, the market also tends to fear the worst. I don't think the RBI will come up with overnight VRRRs immediately, because that will completely stop any transmission going through."  End

Reported by Aaryan Khanna

Edited by Vandana Hingorani

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