RBI's oversubscribed VRRR auction signals strong bank participation amid falling overnight rates

Mumbai: The seven-day variable rate reverse repo (VRRR) auction Friday was oversubscribed as banks preferred parking funds with Mint Road amid a fall in overnight money market rates after the central bank stepped in to keep them anchored around the policy repo rate of 5.5%.

Lower auction size and expectations of further improvement in the liquidity conditions next week led to higher participation, bank treasury dealers said.

Against the notified amount of ₹1.25 lakh crore, the Reserve Bank of India (RBI) received bids worth ₹1.42 lakh crore. The cut-off and weighted average rates came in at 5.49% and 5.48%, respectively, higher than the overnight rates.

"Generally, the participation in VRRR is higher when the overnight rates are down, which was the case on Friday," said Ritesh Bhusari, joint GM, South Indian Bank. "While banks park money depending on the liquidity requirements for a week, there is also growing comfort that the RBI will come with repo auctions to infuse liquidity, if needed, to keep rates in the LAF (liquidity adjustment facility) corridor."

On Friday, weighted average call rate (WACR), which acts as the operative rate for monetary policy transmission, fell to 5.39% compared with 5.54% on Thursday.