Reserve Bank To Hold 14-Day Variable Rate Repo Auction For Rs 1 Trillion On Friday

This will be only the second VRR auction conducted by the RBI since February 2020

The previous VRR auction by the RBI was conducted on February 10 for Rs 50,000 crore.

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The Reserve Bank of India (RBI) will conduct a 14-day variable rate repo (VRR) auction on March 10 (Friday) to inject up to Rs 1 trillion ($12.19 billion) into the banking system, it said in a release on Thursday.

This will be only the second VRR auction conducted by the RBI since February 2020. The previous VRR auction was conducted on February 10 for Rs 50,000 crore. The liquidity deficit in the banking system had widened to over Rs 70,000 crore in February, with the daily average liquidity also slipping into deficit on a monthly basis for the first time since May 2019.

Although liquidity, on a daily basis, was a surplus of around Rs 25,000 crore on March 8, it is expected to dip into a deficit in the coming weeks due to payments for goods and services tax (GST) among others. "We may have close to Rs 2.5 to 3 trillion of outflow towards advance tax and the GST in the next fortnight, which may have compelled the RBI to double the quantum of variable rate repo compared to the previous auction," a trader with a private bank told Reuters.

Why is a variable rate reverse repo (VRRR) auction undertaken?

The VRRR is usually undertaken to withdraw excess liquidity from the system. The central bank has been rebalancing the surplus liquidity in the system by shifting it out of the fixed rate overnight reverse repo window into the VRRR auctions of longer maturity.

The sharp squeeze in liquidity has pushed up money market rates, with the 364-day treasury bills selling at yields above the 10-year paper's on Wednesday. The central bank has said it would continue to resort to variable rate repo and reverse repo as and when necessary to help the market tide over temporary mismatches in the liquidity conditions.