RBI to drain Rs 1 lakh crore as VRRR auctions fail to absorb liquidity

The Reserve Bank of India will hold open market operations to drain out Rs 1 lakh crore from the inter-bank market this month as the variable rate reverse repo (VRRR) auctions turned ineffective to absorb durable liquidity.

The central bank on Friday said that it would conduct OMO sale auctions of government securities in three tranches. The first one of Rs 50,000 crore will be held on September 17.

There will be two more OMO sales of Rs 25,000 crore each on September 21 and September 28.


The decision was taken "on a review of current and evolving liquidity conditions", RBI said.

The interbank market is currently flush with excess liquidity on account of the dollar-rupee swaps that were being held to absorb the $137 billion dollar inflows amassed by banks in India through dedicated mobilisation drive. On Thursday, the system saw an excess flow of Rs 10.43 lakh crore.

The central bank has been doing VRRR auctions for overnight, short-term and long term but that remained largely ineffective.

Governor Sanjay Malhotra earlier in the day said that the central bank might use a combination of instruments to absorb excess liquidity since VRRR was not yielding desired results.

RBI could mobilise a paltry Rs 60,449 crore through a 26-day VRRR auction on Friday against a target of Rs 5 lakh crore. The central bank subsequently held a 4-day VRRR to mop up Rs 3.45 lakh crore, reflecting banks' appetite for shorter-end auctions while they were not keen on giving up the durable liquidity.

RBI is also holding dollar-rupee sell/buy swaps as another tool to suck out liquidity.

Short takes

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