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Informist, Wednesday, Jul. 23, 2025

MUMBAI – With the motive of cooling down money market rates, the Reserve Bank of India conducted the first variable rate repo auction since Jun. 10 on Wednesday, dealers said. The weighted average money market rates were hovering around the Marginal Standing Facility rate of 5.75% Wednesday due to fewer lenders following tax outflows and a full subscription at the variable rate reverse repo auction on Friday. 

At the two-day variable rate repo auction Wednesday, the central bank accepted bids worth INR 500.01 billion out of the total bids of INR 719.02 billion. In the auction, the central bank set the cut-off rate at 5.53%, with the weighted average rate at 5.58%. 

For the first time since the 50-basis-point cut in the repo rate in June, the call rate Wednesday opened above the Marginal Standing Facility rate of 5.75%. The tri-party repo opened at 5.69%, sharply above the repo rate of 5.50%. As of 1550 IST, the call rate reached a high of 5.85%, while the tri-party repo rate touched a high of 5.82%. The central bank's liquidity management operation signals that it wants the money market rates to be within the liquidity adjustment facility corridor of 5.25-5.75%, dealers said. 

While the outflows for goods and services tax, which commenced on Monday, were known to drain INR 1.5 trillion to INR 1.7 trillion from the banking system, the full subscription at the INR 2 trillion variable rate reverse repo auction further fueled the rise in money market rates. "While the rates have been higher for three days, today (Wednesday), the weighted average call rate rose sharply above MSF rate. This resulted in RBI announcing a VRR," a dealer at a state-owned bank said. "I feel that going forward, they (RBI) will continue to deploy a combination of VRRs and VRRRs as and when required."

Banks parked the entire INR 2 trillion at the variable rate reverse repo auction as a few participants had expected mid-month government spending to lessen the impact of goods and services tax outflows, dealers said. However, the speculation proved to be unfounded. 

"No one had expected that rates would have gone so high after VRRR. The people who had participated in VRRR were expecting the rates to rise just slightly above the repo rate (of 5.50%)," a dealer at a private sector bank said.

Consequently, the liquidity surplus, which averaged INR 3.22 trillion in July so far, fell below the INR 3 trillion mark this week, data from the RBI showed. On Tuesday, the net liquidity absorbed by the RBI--a proxy for the systemic liquidity surplus--was INR 2.42 trillion, up from INR 2.40 trillion on Monday. Borrowing by banks through the Marginal Standing Facility window rose to INR 132.73 billion, the highest seen since May 1.

Following the variable rate repo auction, market participants were assured that the central bank would not allow rates to rise significantly, dealers said. "Now, by coming up with VRR, the RBI has given the market surety that they won't let rates weighted average rise beyond 5.75%." This move has sparked anticipation of an overnight variable rate repo auction by the central bank on Thursday, dealers said. The quantum at the auction is expected to be around INR 500 billion, dealers said. 

Some others believe that the central bank may announce a variable rate repo auction on Thursday only if the weighted average rate rises sharply above the repo rate. They reasoned that inflows of INR 2 trillion are scheduled for Friday from the reversal of the seven-day variable rate reverse repo auction conducted on Jul. 18, dealers said. 

"I think tomorrow (Thursday) the call rates should be in the range of 5.40-5.60% and TREPs (triparty repo rates) should be 10 bps (basis points) below that," a dealer at another state-owned bank said. "If the rates rise beyond this, then the RBI may come with a VRR."   End

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

Reported by Siddhi Chauhan and Vidhushi RajPurohit

Edited by Saji George Titus

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