The Reserve Bank of India (RBI) has shifted gears on its liquidity operations, moving from injecting funds into the banking system in March to absorbing surplus liquidity through variable rate reverse repo (VRRR) auctions in April. The RBI had announced for the second time this month that it will conduct a seven-day VRRR auction. The result of the auction, which took place on April 17, showed that the RBI had sucked out Rs 2 lakh crore worth of liquidity from the banking system.
Before this, the RBI had conducted a similar VRRR auction on April 10, where it pulled out a similar quantum from the banking system. A VRRR auction is an initiative undertaken by the central bank, where the RBI absorbs excess cash from banks, and banks themselves bid for higher interest returns than the fixed reverse repo rate.
These moves come after a banking liquidity surplus crossed Rs 5 lakh crore in April and remained at that level for about a week straight. “System liquidity is currently running significantly above comfort levels, and that likely explains the RBI’s shift to VRRR auctions,” said Dilip Parmar, a research analyst with HDFC Securities. RBI governor Sanjay Malhotra stated that the central bank will continue to monitor the banking liquidity system to ensure ample funds are available.
Additionally, these measures were taken as the Indian rupee was consistently hitting multiple record lows in March due to elevated Brent crude prices. Market participants had earlier pointed out that these forex interventions from the RBI could have had an effect on the banking liquidity system. Now that the rupee has temporarily stabilized, the RBI may announce a combination of VRR and VRRR auctions to maintain equilibrium in the banking system.
