The Reserve Bank of India (RBI) announced on Thursday that it will hold a 14-day variable rate repo (VRR) auction on March 10 to infuse up to 1 trillion rupees ($12.19 billion) into the banking sector.
The RBI will hold only its second VRR auction since February 2020. The previous VRR auction was held on February 10th for Rs 50,000 crore.
The banking system’s liquidity deficit extended to over Rs 70,000 crore in February, with daily average liquidity also falling into deficit on a monthly basis for the first time since May 2019.
Although liquidity was in surplus on a daily basis on March 8, it is projected to fall into deficit in the following weeks due to payments for goods and services tax (GST), among other things.
“We may have close to Rs 2.5 to 3 trillion of outflow towards advance tax and GST in the next fortnight, which may have compelled the RBI to double the quantum of VRR compared to the previous auction,” a trader with a private bank said.
Also Read | RBI raises repo rate by 25 basis points to 6.50 per cent
The tightening of liquidity has pushed up money market rates, with 364-day treasury bills yielding more than the 10-year paper on Wednesday.
The central bank has stated that it will continue to use variable rate repo and reverse repo as needed to help the market overcome temporary liquidity shortages.
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