The Reserve Bank of India (RBI) demonstrated strong demand in the Variable Rate Repo Reverse Repo (VRRR) auctions on Thursday. The total volume of bids received was 1.91 trillion rupees against a declared limit of 1.5 trillion rupees.
The central bank conducted two overnight auctions and plans to hold an additional three-day VRRR auction worth 1.5 trillion rupees on Friday.
Market participants attributed the high demand to the fact that overnight rates were lower than the weighted average rate offered by the RBI in the VRRR auction. Banks placed the announced amount at the weighted average rate of 5.24 percent.
The Weighted Average Cost of Funds (WACR), which is the target indicator for monetary policy, stood at 5.17 percent, an increase from the previous close of 5.15 percent.
A money market dealer at a public sector bank noted: 'Demand was strong because overnight rates fell due to excess liquidity, while the rate offered by the RBI is higher. Naturally, banks decided to place their funds there.'
According to market participants, the central bank conducts auctions to absorb excess liquidity from the banking system and maintain alignment of overnight rates with the target policy rate. The current repo rate is 5.25 percent.
According to the latest RBI data, net liquidity in the banking system exceeded 3.70 trillion rupees on Wednesday. The overnight rate for the tri-party repo dropped below the Savings Deposit Facility (SDF) rate of 5 percent. On Thursday, it rose to 5.06 percent, compared to 4.96 percent at the previous close.
A private bank dealer commented: 'The TREPS rate fell below 5 percent. RBI wants overnight rates to remain around the repo rate.'
The VRRR auction is a liquidity absorption tool through which the RBI temporarily withdraws excess funds from banks.