Reserve Bank Of India’s Variable Repo Rate auction sees huge response by banks suggesting an increased demand for liquidity in banking sector.
- Banks submitted bids worth ₹1,13,915 crore, significantly exceeding the RBI’s offer of ₹50,000 crore.
- Liquidity Deficit: It is estimated that liquidity in the banking system is in deficit to the tune of around ₹1.54-lakh crore.
Call Money Rate
Call Money Rate is the rate at which short term funds are borrowed and lent in the money market.
- Duration: 1 day is the duration of the call money loan.
- Participants: RBI, banks, primary dealers participate in the call money market.
- Function:
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- Banks resort to these type of loans to fill the asset liability mismatch, comply with the statutory CRR and SLR requirements and to meet the sudden demand of funds.
- Demand and supply of liquidity affect the call money rate. A tight liquidity condition leads to a rise in call money rate and vice versa.
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Variable Rate Repo Auction
Also called Term Repo Rates, It is a liquidity injection tool of the RBI for liquidity management in the economy.
- Current situation: The RBI has been conducting VRRs to inject liquidity on a temporary basis into the banking system since december 2023
- In mid-January, the tenor of the VRR was increased to 14 days to match the CRR cycle for steady State injection. Further to this, it has been conducting short-dated VRRs (1-7day) periodically to ‘fine tune’ market liquidity.
- VRR Auctions: They are conducted by the RBI, when the weighted average call money rate trends above the repo rate in the interbank money market, serving as a signal to the RBI of System Liquidity Deficit.
- Tenure: It is a short term liquidity injection against collaterals with a tenor of Overnight to 13 days usually.
- But, for injection of durable liquidity, the RBI conducts VRR auctions for a tenor beyond 14 days very rarely.
- Rate of Interest: It generally is borrowed at a rate decided by market generally lower than Repo Rate (though not less than Reverse Repo Rate).
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Other strategies to Infuse liquidity in Economy
The Target is to let interbank liquidity enter into a surplus by July.
- RBI Transfers: RBI has transferred to the government ₹2.1 trillion as a dividend coupled with the cancellation of weekly treasury bill auctions of ₹60,000 crore.
- RBI’s Foreign Exchange intervention: The FX strategy of RBI is the main driver of interbank liquidity.
- FPI accounts have resumed buying India Government Bonds (IGBs), though in small sizes for now.
- Inflows: Inflows from GOI redemptions, interest payments and lower T-bill issuance will also start.
1 Jun 2024
