The Reserve Bank of India (RBI) has stepped up the amount it is willing to offer the banking system in the 7-day variable rate repo (VRR) auction, scheduled on Friday (December 22), to ₹1.75-lakh crore against ₹1-lakh crore offered last week to help banks overcome liquidity deficit.

As on December 20, banking system liquidity deficit was near 8-year-high of ₹2.27-lakh crore (without adjusting for daily cash reserve ratio imbalances), per Nuvama Wealth Management’s assessment.

The central bank will be conducting the 7-day VRR auction even as ₹1,00,006 crore it infused into the banking system via the 7-day VRR auction on December 15 will be returned by banks on Friday (December 21).

“In the overnight segment, the weighted average rate continues to be slightly above 6.75 per cent (the marginal standing facility/MSF rate). Hence, huge bidding interest can be expected in the forthcoming VRR auction.

“Besides the above, banks are also increasing issuance of certificate of deposits to manage their liquidity position,” said Venkatakrishnan Srinivasan, Managing Partner, Rockfort Fincap LLP.

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In a sign of liquidity tightness in the banking system, banks had placed bids aggregating ₹2,73,354 crore at the 7-day VRR auction last Friday against the notified amount of ₹1-lakh crore.

RBI conducted the last VRR auction in view of likely outflows from the banking system on account of advance tax and GST payments.

The central bank also conducted the aforementioned auction to absorb the ₹22,468 crore inflows banks received on account of reversal of the 14-day variable rate reverse repo (VRRR) auction conducted on December 1, 2023.

RBI allotted liquidity amounting to ₹1,00,006 crore at the weighted average rate of 6.63 per cent.

Liquidity tightness

In his latest monetary policy statement, RBI Governor Shaktikanta Das observed that system liquidity, as measured by the net position under the liquidity adjustment facility (LAF), turned into deficit mode for the first time in September 2023 after a gap of nearly four and a half years since May 2019.

“Deficit liquidity conditions persisted during October and November prompting large recourse to the marginal standing facility (MSF) by banks. In parallel, utilisation of the standing deposit facility (SDF) has also been high. The overall tightening of liquidity conditions is attributed mainly to higher currency leakage during the festive season, government cash balances and Reserve Bank’s market operations. Driven by these autonomous factors, system liquidity tightened significantly compared with what was envisaged in the October policy statement,” Das said.

Consequently, the need to undertake auction of OMO sales has not arisen so far.

“The evolution of liquidity conditions has been in alignment with the monetary policy stance. More recently, however, as government spending has picked up and system liquidity has got more evenly balanced among market participants, pressures have eased and the net LAF position has evened out broadly.

“Going forward, government spending is likely to further ease liquidity conditions. On our part, the Reserve Bank will remain nimble in liquidity management,” the Governor said.