RBI's 8-day VRR auction sees tepid demand, likely due to tenor

The eight-day variable rate repo (VRR) auction that the Reserve Bank of India conducted on Thursday got bids for less than one-tenth of the notified amount, with treasury executives citing the tenure of the operation as a likely reason for the weak demand.

The RBI offered to infuse Rs 1 lakh crore in the banking system through the VRR auction that would reverse, or be repaid, on March 21, but it received bids for only Rs 9,860 crore. The central bank also conducts daily overnight VRR auctions.

Treasury heads said the auction could have seen more demand if the maturity date were in April, in the new fiscal year.


“There is no difference between borrowing overnight and borrowing for eight days. If I have the flexibility to borrow every day, I will borrow when the need arises and not for eight days,” Jana Small Finance Bank’s head of treasury Gopal Tripathi told ET. “Plus, this would mature within March; if the reversal date were crossing March, there would have been more demand.”

The RBI has been conducting these auctions to inject liquidity in anticipation of outflows from the banking system due to advance quarterly tax and GST payments.

“These steps (to inject liquidity) are pre-emptive ahead of a seasonal squeeze in March, being a fiscal year end, besides other contributing factors including FX market intervention, tax outflows, volatility in capital flows and currency in circulation,” DBS Bank said in a note.

Economists expect an outflow of more than Rs 2 lakh crore due to quarterly advance income tax payment and another Rs 1 lakh crore on GST outflows, according to IDFC First Bank.

Daily average liquidity was a deficit of Rs 1.04 lakh crore as on March 12, RBI data showed. This is expected to widen after tax outflows.