The weighted average overnight call rate (WACR) rose above the Reserve Bank of India’s (RBI’s) policy repo rate of 5.5 per cent on Tuesday for the first time in the current financial year, amid Goods and Services Tax (GST) outflows.
The WACR settled at 5.62 per cent, up from the previous close of 5.48 per cent. The weighted average overnight TREPS (Triparty repo) rate settled at 5.69 per cent, up from 5.51 per cent on Monday.
Banking system liquidity was in surplus by Rs 2.39 trillion on Monday, around 1 per cent of banks’ net demand and time liabilities (NDTL), according to the latest data from the central bank. The RBI has been conducting variable rate reverse repo auctions to absorb liquidity from the system. The WACR is the operating target of monetary policy, and the central bank aims for it to align with the policy repo rate.
The RBI has stated its intent to maintain a liquidity surplus of 1 per cent of NDTL.
Market participants noted that with surplus liquidity currently around 1 per cent of NDTL, the likelihood of additional VRRR auctions in the near term has diminished. Dealers expect the RBI to resume VRRR operations in the first week of August, following a pick-up in government spending.
“The overnight money market rates are rising because of GST outflows,” said a dealer at a primary dealership. “The liquidity is near 1 per cent of NDTL, meaning no more VRRRs are needed at the moment. They (RBI) might return with VRRRs at the start of the month when government spending kicks in,” he added.
“If the RBI does come up with a VRRR auction, the amount will be small, and it will be negative for the market,” said a dealer at another primary dealership.
The RBI received bids worth Rs 2.07 trillion against the notified amount of Rs 2 trillion at the seven-day Variable Rate Reverse Repo (VRRR) auction on Friday, which coincided with the maturity of the previous Rs 2.07 trillion VRRR auctions. Banks largely rolled over these funds into the new auction, said dealers.
The RBI has been conducting a series of VRRR auctions since the last week of June, as a net surplus liquidity of above Rs 3 trillion in the banking system had kept the overnight weighted average call rate near the SDF rate of 5.25 per cent and below the repo rate of 5.50 per cent, with TREPS rates also slipping below the SDF for the past month.
