RBI's 30-day VRRR operation sees muted response amid high banking liquidity surplus

Mumbai: The Reserve Bank of India's 30-day variable rate reverse repo (VRRR) operation on Monday garnered a muted response as treasury heads did not want to lock in funds for a longer duration. The weak response came despite the banking system liquidity surplus posting a near-five-year high at ₹11.16 lakh crore on September 6.

The daily average surplus in September so far is ₹11.01 lakh crore. The daily average was ₹3.67 lakh crore in August and ₹1.07 lakh crore in July.

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"Most of them do not want to park funds for such a long time at 5.24%. There is also a camp that expected a rate hike in the October policy and would want their funds to get a better rate of interest," said Alok Singh, head of treasury at CSB Bank.

Consequently, amid high surplus liquidity, the weighted average call rate (WACR) declined to 4.50%, 100 basis points below the repo rate. The Reserve Bank prefers the call rate to be closely aligned with the repo rate.

The RBI will conduct another overnight VRRR auction of ₹5 lakh crore on Tuesday to drain out liquidity.

Though the longer-tenor VRRRs are seeing a muted response, demand for overnight operations has been better. For instance, in Monday's overnight VRRR, the RBI received bids worth ₹3.53 lakh crore against the notified amount of ₹5 lakh crore.