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In a first, the Reserve Bank of India (RBI) has announced that it will conduct daily variable rate repo (VRR) auctions on all working days in Mumbai, until further notice.
The daily auctions, aimed at easing the current liquidity tightness in the banking system, will begin on Friday, with a notified amount of Rs 50,000 crore.
The liquidity deficit in the banking system has exceeded Rs 2 trillion in the past few days.
According to the latest data, the liquidity deficit in the banking system was Rs 2.09 trillion on Tuesday, while on Monday it was Rs 2.5 trillion.
The situation is expected to worsen after the start of goods and services tax (GST) outflows later in the month.
“After reviewing the current and evolving liquidity conditions, it has been decided to conduct VRR auctions on all working days in Mumbai, with reversal occurring on the next working day, until further notice,” the RBI said on Thursday.
According to the revised liquidity framework announced on February 6, 2020, the 14-day VRR/reverse repo auction was termed the main liquidity operation, while overnight and up to 13-day auctions were termed ‘fine-tuning’ operations.
These daily auctions will have their reversal on the next working day, except for Fridays, when the reversal will take place on the following Monday or the next working day if Monday is a holiday in Mumbai.
The auctions are scheduled to be conducted between 10 am and 10.30 am.
The auction amount will be determined by the RBI based on its liquidity assessments and will be announced separately on the RBI’s official website.
This initiative is part of the RBI’s efforts to ensure stable liquidity conditions in the banking system, according to market participants.
Eligible participants, including standalone primary dealers, will be allowed to participate in these auctions.
"Given the current liquidity conditions, participants are likely to bid at the higher end of the band, which means borrowing will come at a slightly higher cost.
"However, this is still a significant relief, especially as GST outflows are yet to happen, and the liquidity situation has been quite tight.
"While these small measures help, addressing durable liquidity may require more substantial actions, possibly at the policy meeting,” said Anshul Chandak, head of treasury at RBL Bank.
“Over the past two weeks, the focus has entirely shifted to liquidity management rather than rate cuts.
"Some believe that a further 50-basis point cash reserve ratio cut might be on the table to provide durable liquidity.
"Tackling liquidity issues will likely be the top priority in the upcoming policy. Decisions on rate cuts will depend on the RBI’s assessment of data, including Consumer Price Index and other economic indicators,” he added.
Banks were reluctant in the five-day VRR auctions conducted by the RBI on Wednesday, viewing it as a temporary market intervention tool aimed at addressing short-term liquidity needs in the banking system, dealers said.
Banks bid Rs 3,980 crore against a notified amount of Rs 75,000 crore.
“This will create a sense of assured liquidity as the amount will be rolled over every day.
"People will try to take it positively,” said a senior executive at a primary dealership.
“The core liquidity is negative by almost Rs 1 trillion, and the entire system is in deficit by around Rs 3 trillion, which is expected to remain tight until the end of March,” he added.
