The first such VRR auction starting on Thursday is Rs. 50,000 crore and the Reserve Bank of India (RBI) will decide the further auction amount depending on the liquidity position on that day, the central bank said in a statement on Wednesday evening. . The auction will be reversed the next day.
The move to halt VRR operations comes as the average liquidity in the system for two weeks is Rs. 1 lakh crore is in deficit.
Average daily deficit in banking system liquidity till first fortnight of January was Rs. 1.45 lakh crore, while on Tuesday alone it was Rs. 2.09 lakh crore, RBI data shows.
The Treasury head, however, believes that VRR operations alone will not reverse the major liquidity deficit faced by the banking system. However, such operations will adjust call rates closer to the current policy repo rate of 6.50%.
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“The difference between the call rate and the repo rate occurs when there is a permanent tightness in liquidity, especially during the last quarter of the year, when demand for money is high,” said Gopal Tripathi, head of treasury, Jana Small Finance. The bank said “daily VRR will only smooth the weighted average call rate (WACR) and will not affect liquidity as the transaction will be reversed. the next day.”
Hence, the RBI will need to inject substantial, sustainable liquidity to prevent the call rate from rising, economists said. Additionally, liquidity – or shortages – in the banking system will affect credit withdrawals.
Wednesday’s WACR was 6.45%, as against 6.36% the previous day. Additionally, the Mumbai Interbank Offer Rate (MIBOR), the benchmark for interbank lending, was around 7% last week, breaching the previous high of 6.85%.
Core liquidity in the banking system turned negative – Rs 60,000 crore – on 10 January. The RBI also bought and sold $2-3 billion on Wednesday and Friday last week to ease overall liquidity in the banking system.
“The RBI will also need sustainable liquidity given the sharp decline in core liquidity,” said Gaura Sen Gupta, chief economist at IDFC First Bank.
“Daily VRR auction will be more effective as there is more demand for short duration VRR. A guarantee that VRR will be conducted at a specific time each day will help reduce volatility in overnight rates,” Sen Gupta said.
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