Central Bank's Seven-Day Variable Rate Reverse Repo (VRRR) Auction
The recent VRRR auction conducted by the central bank witnessed lower participation from banks as they opted to lend in the overnight market rather than park funds with the Reserve Bank of India (RBI).
Key Reasons for Undersubscription
- Banks’ preference for the overnight market, influenced by higher overnight rates during the auction.
- The auction coincided with a reporting Friday, requiring banks to comply with cash reserve ratio (CRR) requirements.
Implications of VRRR
- VRRR does not permanently remove liquidity but increases its cost, raising overnight rates.
- The aim is to maintain the weighted average call rate (WACR) and TREPS rate within the liquidity adjustment facility (LAF) corridor.
- RBI's objective is to manage a liquidity surplus around 1% of NDTL (₹2.5 lakh crore).
Current Liquidity Status
The VRRR auction helped absorb a portion of the nearly ₹2 lakh crore excess liquidity remaining from past VRRR operations, with current liquidity surplus standing at ₹3.15 lakh crore.
