Mumbai: The central banks seven-day variable rate reverse repo (VRRR) auction was undersubscribed as banks picked to provide in the overnight market rather of parking funds with Mint Road, dealers said.Lower banking involvement was also credited to the reporting Friday, a day when banks require to report their cash reserve ratio (CRR) compliance to the Reserve Bank of India (RBI), treasury officials said.Against the alerted quantity of 2.5 lakh crore, the reserve bank got quotes worth only 1.52 lakh crore, which was accepted by the RBI.
The cut-off and weighted typical rate both came in at 5.49%.
The Repo currently is 5.5%.
Usually, there is 20-30 basis points spread in between cut-off cost and the overnight rates.
On Friday, that spread was lower than 20 bps as overnight rates had increased throughout the time of auction.
So, many banks preferred financing in the overnight market instead of parking with the RBI.
The 7-day VRRR was also for a larger quantity which also was a little bit of an unfavorable, said Rajeev Pawar, head of treasury, Ujjivan Small Finance Bank.VRRR does temporarily remove liquidity, but increases cost of liquidity, therefore pushing up over night rates.Live EventsBank treasury officials said that the goal of this exercise is to ensure that the weighted typical call rate (WACR) and the TREPS rate within the liquidity adjustment facility (LAF) passage.
It also suggests that RBI is not comfortable with massive liquidity surplus.The RBIs state goal is to keep the liquidity surplus around 1% of NDTL, which exercises to be 2.5 lakh crore.The VRRR auction removed some part of the excess liquidity of nearly 2 lakh crore that came from turnaround of the previous 2 VRRR operations.
Currently, liquidity is in the surplus of 3.15 lakh crore.