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Informist, Thursday, Jan. 29, 2026

 

By J. Navya Sruthi and Aaryan Khanna

 

 

MUMBAI/NEW DELHI – The Reserve Bank of India's announcement of an INR-250-billion, 90-day variable rate repo auction Friday has brought confusion among market participants due to the unusually long length of the operation. That initial hesitation has turned to anticipation of full subscription after the RBI introduced a unique prepayment option for subscribers at the auction.

 

 

On Tuesday, the RBI said participants will have an option to prepay the amount borrowed at the 90-day VRR auction at least two days prior to the original date of reversal, which is Apr. 30. However, there is no option for partial prepayment; participants must repay the entire amount that they borrow at the auction. Still, the auction is likely to be oversubscribed with the cut-off being higher than the minimum 5.26%.

 

"The decision by RBI to prepay the full amount borrowed in repo for 90 days...is something not seen in any other country," State Bank of India said Wednesday in a research report. "It might inject some volatility, but the good thing is that RBI is introducing innovations in liquidity management and it may even result in new bidding strategies."

 

RBI Governor Sanjay Malhotra said in December the new liquidity management framework effective September gave the central bank the flexibility to use operations from overnight to multiple days to keep its operating target at the policy repo rate. The weighted average call rate, which is the operating target, has been above the repo rate of 5.25?tween Dec. 15 and Wednesday.

 

Primary dealerships were expected to be the biggest beneficiaries of such an auction as they were usually the biggest borrowers in the interbank call money market, especially in early trade. However, dealers from those institutions said they prefer the basket repo window to raise cash against their bond holdings instead of VRRs. Bonds tendered are the VRR are not fungible and cannot be freely traded, which is disadvantageous for these heavily trading market-makers.

 

While some banks' demand would be met, dealers said INR 250 billion is a meagre amount to have a significant impact on rates of money market paper. Rates on a three-month CD were at 7.20-7.25% Thursday, surging from 6.03% a month ago. Rates on a one-year CD were also higher at 7.15-7.20% Thursday from 6.62% in December.   

 

"We need at least 1.0-1.5 lakh crores (INR 1 trillion to INR 1.5 trillion) of consistent liquidity in system for yields to fall. RBI is just giving a hint to the market that it wants to increase (systemic) liquidity," a dealer at a private-sector bank said. The systemic liquidity surplus--as measured by the RBI's daily liquidity absorbed from the banking system--has averaged INR 582 billion so far in January.

 

Another consideration among traders was that they may miss out on the benefit of any rate cuts the RBI's Monetary Policy Committee may decide on in its February or April meetings. With the option to exit the VRR early, traders no longer have a fear of missing out and may lock in the rate for the extended duration, dealers said.

 

NOT A CHEAP CD

While many traders initially approached the VRR auction as a three-month certificate of deposit, asset-liability management norms make participation a bit more difficult. CDs issued by banks count towards regulatory norms on both their liquidity coverage ratio and statutory liquidity ratio, which makes it imperative for them to roll over past issuances despite the high rates.

 

"Banks having LCR triggers will opt for CDs to maintain SLR else their HQLA (high quality liquid assets) will come down," a dealer at a state-owned bank said.

 

Instead, it is only banks holding high quality liquid assets well in excess of 100% of their expected outflows in the next 30 days, the regulatory minimum, which may participate aggressively at the auction. This would include most state-owned banks, while some private-sector banks may be a bit more hesitant after having trimmed their excess LCR in the past two quarters to generate profits. In this too, the "put" option or redemption feature on the 90-day VRR offers a risk-free exit, which is likely to draw demand.

 

"Especially in the last quarter (March quarter), banks are acutely aware of maintaining their LCR securities. So it is only those with excess LCR who will be in a position to participate in any such auction," the asset-liability management head at another private-sector bank said. "The good thing about this move is that most PSU banks would have some room, and they will also receive the benefit of the new norms on Apr. 1." The RBI's new norms on the liquidity coverage ratio are effective April and are expected to the free up around 6 percentage points of high-quality liquidity assets from banks, the central bank said.

 

Since mid-December, the RBI has conducted 25 short-term VRR auctions through which it infused over INR 13 trillion of gross transient liquidity into the banking system. Along with these temporary liquidity operations, the central bank has also infused INR 2.5 trillion through open market operations so far since December and around INR 1.5 trillion through two dollar-rupee buy/sell swap auctions. In the latest round of liquidity measures announced last week, the RBI will also add durable liquidity through INR 1 trillion of open market operation purchases of gilts and over INR 900 billion through a dollar-rupee buy-sell swap auction by the end of next week.  End

 

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

 

Edited by Akul Nishant Akhoury

 

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