RBI conducts 4-day VRRR auction to reduce liquidity in the banking system

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The Reserve Bank of India on Friday conducted a 4-day variable rate reverse repo auction (VRRR) auction to suck out liquidity from the banking system in the backdrop of sharp decline in overnight money market rates and banks’ deployment of funds at the liquidity adjustment facility (LAF) exceeding drawals.

The central bank had last conducted a VRRR auction on December 30. Overnight money market (weighted average) rates on Friday declined to 6.38 per cent from previous day’s 6.62 per cent.

The 4-day VRRR auction came even as overall system liquidity continued to be deficit mode. However, response to the auction was tepid, with banks parking only ₹3,975 crore against the notified amount of ₹50,000 crore. The RBI accepted all the offers made by Banks at a weighted average rate of 6.48 per cent.

Banks had parked ₹53,101 crore at the one-day Standing Deposit Facility (SDF) window at 6.25 per cent on February 1. Simultaneously, some banks borrowed one-day funds aggregating ₹7,471 crore at 6.75 per cent, per RBI data.

Market players said the RBI may have tried to suck out the net liquidity (of ₹45,630 crore) under LAF via VRRR auction in keeping with its withdrawal of accommodation stance.