RBI Conducts Three VRR Auctions in a Day

Mumbai, March 22, 2024: The Reserve Bank of India (RBI) took decisive action on Friday to address the liquidity tightness in the banking system. As the liquidity deficit widened toRs 1.38 trillionon Thursday, the central bank conductedthree variable rate repo (VRR) auctionsto infuse much-needed liquidity.

Liquidity Challenges and Rising Money Market Rates

1. Liquidity Deficit:
   • The liquidity deficit within the system has been a growing concern.
   • Latest data revealed that the banking system’s liquidity deficit reachedRs 1.38 trillion.
2. Weighted Average Money Market Rates:
   • The weighted average money market rate surged above theMarginal Standing Facility (MSF)rate.
   • On Friday, the weighted average money market rate closed at6.77%, compared to6.73%on Thursday.
   • The current MSF rate stands at6.75%.
3. Persisting Liquidity Challenges:
   • Market participants anticipate that the liquidity deficit will persist.
   • The government’s borrowing program for the next financial year, starting in April, adds to the caution.
   • Banks are wary of releasing funds, especially given the end of the financial year.

Details of the VRR Auctions

1. First 14-Day VRR Auction:
   • Banks submitted bids aggregatingRs 1.05 trillionagainst the notified amount ofRs 25,000 crore.
   • The central bank allotted funds totalingRs 25,004 croreat a weighted average rate of6.73%.
2. Second Four-Day VRR Auction:
   • Banks placed bids totalingRs 1.32 trillionagainst the notified amount ofRs 50,000 crore.
   • The central bank allotted funds amounting toRs 50,005 croreat a weighted average rate of6.74%.
3. Third Four-Day VRR Auction:
   • Banks submitted bids aggregatingRs 40,700 croreagainst the notified amount ofRs 50,000 crore.
   • The central bank allotted funds totalingRs 40,700 croreat a weighted average rate of6.73%.

Outlook and Implications

• The government’s spending may provide some relief, but banks remain cautious.
• With auctions of aroundRs 1.5 trillionscheduled for the last week of March, the funds are expected to be absorbed by the government itself.

The RBI’s proactive measures aim to stabilize liquidity conditions and ensure the smooth functioning of the financial system. As the new fiscal year approaches, market participants will closely monitor developments and the central bank’s response.

Disclaimer: This article provides an overview of recent events and does not constitute financial advice. Readers are encouraged to consult with financial professionals for personalized guidance.