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RBI may resort to overnight VRRR to manage liquidity

June 08, 2023

RBI may resort to overnight VRRR to manage liquidity
The Reserve Bank of India may have to opt to absorb liquidity for just a day using variable rate reverse repo (VRRR) auctions, as bankers remain reluctant to park funds for a longer period of time, bankers and analysts said.

“The RBI’s intention is to keep the overnight rate around the repo rate consistently. If they want the overnight rate to align to the repo, the easiest and cleanest way to do is to give an overnight VRRR,” said A Prasanna, head of research at ICICI Securities Primary Dealership. Over the past week, the central bank has offered to withdraw money for 14 days, 4 days, 3 days and 2 days, but banks have remained wary even though surplus liquidity has been over 2 trillion rupees ($24.24 billion). For instance, the 2-day VRRR on Wednesday got offers worth 18.50 billion rupees, well below the targeted 750 billion rupees. Overall, the RBI has absorbed 1.52 trillion rupees over the last four days, compared with a target of 4.50 trillion rupees.
 
“We have advance tax and GST tax outflows that are due over the next few days and till then, the RBI could opt for overnight reverse repos,” the treasury head of a state-run bank said. “We will have more clarity on durable liquidity surplus in a few weeks.” Meanwhile, some traders have not ruled out the RBI resorting to a dollar-rupee sell/buy swap, wherein it will infuse spot dollars and remove rupee liquidity.
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