RBI intensifies liquid drain with dual VRRR auctions
With liquidity continuing to be in surplus in the banking system, the Reserve Bank of India has conducted liquidity mop up operations via variable rate reverse repo (VRRR) auctions, sometimes conducting even two auctions in a day, on almost all days of August so far.
This move is in line with its withdrawal of accommodative monetary policy stance. RBI mopped up surplus liquidity through VRRR in July too.
On Wednesday, the central bank conducted two VRRR auctions to suck out surplus liquidity from the banking system.
Liquidity sweep
At the first two-day VRRR auction, RBI received offers from banks for parking liquidity amounting to ₹22,882 crore against the notified amount of ₹50,000 crore. It accepted these offers at a weighted average rate of 6.49 per cent.
At the second two-day of VRRR auction, the central bank received offersamounting to ₹7,575 crore against the notified amount of ₹50,000 crore. It accepted these offers at a weighted average rate of 6.49 per cent.
India Ratings and Research (Ind-Ra), in a report, noted that liquidity of the banking system eased in a meaningful way in July 2024, with the overall liquidity, including daily net balance, being in surplus throughout the month.
The rating agency assessed that the average daily net liquidity adjustment facility’s balance had been hovering around ₹1.5 lakh crore surplus during the second week of August 2024.
Moderate surplus
Ind-Ra expects Q2FY25 to remain in moderate surplus on an average basis, and the government spending pattern will be the key to ensure easing of liquidity on a sustainable basis, especially Q3FY25 onwards.
The agency sees improvement in liquidity to aid money market activities in Q2FY25. On the other hand, the tapering off of banking system credit will complement the reduction in demand for certificates of deposits by banks. This will also favour short-term money market rates.