The Reserve Bank of India (RBI) is set to hold a variable rate repo (VRR) auction for the third time in less than two weeks due to ongoing tight liquidity conditions and persistently high overnight rates.
Scheduled for later today, the RBI will conduct a two-day repo worth 500 billion rupees ($6 billion) after assessing the present liquidity situation. This decision comes following the RBI's earlier infusion of 1.75 trillion rupees through a seven-day VRRR on December 22 and an additional 1 trillion rupees the previous week, which matured on the same day.
Concerns have arisen as market participants anticipated a short-term cash injection from the central bank due to a significant liquidity deficit within the banking system, reaching nearly eight-year highs. As of December 26, the deficit stood at 2.68 trillion rupees, marking its highest point since April 2016.
Despite these liquidity injections, overnight rates persistently remain higher than the marginal standing facility (MSF) rate of 6.75%, which represents the upper limit of the monetary policy corridor. On Wednesday, the weighted average interbank call money rate was recorded at 6.89%, while the weighted average TREPS rate stood at 6.79%. This ongoing elevation in overnight rates has prompted the RBI's decision to conduct another repo auction to address the liquidity concerns in the financial market.
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