RBI Special Repo Auction

January 21, 2022

Reserve Bank of India (RBI) conducted a variable rate repo operation on January 20, 2022 for infusing liquidity, instead of using variable rate reverse repo operations (VRRR) to suck out cash.

Highlights

This measure was taken because larger goods and services tax (GST) collection tightened liquidity recently.
RBI has proposed to lend the banking system Rs 50,000 crore in a day, while it received bids for Rs 65,700 crore.
Cut-off rate was 4.06 per cent and weighted average rate 4.10 per cent. Both are higher than repo rate of 4 per cent.
Weighted average call money rate reached to 4.3587 per cent on January 20, showing liquidity stress in banking system. This rate is used by banks for the purpose of interbank lending.

Call Money Rate

The lowest call money rate was 2.80 per cent while highest rate was 4.65 per cent. This reflected liquidity asymmetry where one set of banks was having a low liquidity while money concentrated with the lender banks (usually public sector banks), because of their high deposit base.

Total system liquidity

Total system liquidity is at a surplus of Rs 6 trillion. This money is enough for money market rates to remain soft. However, overnight interbank rates have increased above the repo rate, along with the increase in money market rates and 10-year bond yields.

VRRR auction

RBI has been continuously conducting the VRRR auctions. It aims to remove progressively higher amounts from banking system because its liquidity measures have flooded the banking system with funds. Till December 31, 2021, RBI had planned to remove Rs 7.5 trillion of liquidity by means of 14-day VRRR auction. But in auctions, banks parked only Rs 2.67 trillion.

Rebalancing liquidity management

RBI started rebalancing its liquidity management in February 2020, when it shifted its liquidity absorption tool from “fixed-rate overnight reverse repo window” to VRRR auctions of longer maturity. To absorb the additional liquidity in system, RBI announced to conduct VRRR programme, because it has higher yield prospects as against fixed rate overnight reverse repo.

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