RBI introduces daily VRR operations to boost banking liquidity amidst deficit
banking system by announcing daily variable rate repo (VRR) operations, which would accompany the up to $3-billion worth of dollar-rupee buy-sell swaps conducted since Friday, as Mint Road seeks to restrain short-term interest rates that otherwise threaten to dislocate India’s money markets.
The first such VRR auction, starting Thursday, will be for Rs 50,000 crore, and the Reserve Bank of India (RBI) will decide on a further auction amount based on the liquidity conditions for that day, the central bank said in a statement Wednesday evening. A reversal of the auction will take place the next day.
The move to hold VRR operations comes as average liquidity in the system is in a deficit of more than Rs 1 lakh crore for two weeks.
The average daily deficit in banking system liquidity through the first fortnight of January stood at Rs 1.45 lakh crore, while on Tuesday alone it was at Rs 2.09 lakh crore, RBI data showed.
Treasury heads, however, believe the VRR operation alone will not help reverse the core liquidity deficit faced by the banking system. However, such operations would align the call rates closer to the current policy repo rate of 6.50%.
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