RBI announces long-term auction to absorb liquidity

The central bank on Wednesday said it will conduct 28-day convertible reverse repo auction ₹50,000 crore on 2nd November. It also announced a 7-day VRRR, albeit reducing the volume to . Has been done ₹to 1.5 trillion ₹2 trillion ago.

So far, RBI has absorbed liquidity using 7-day and 14-day VRRR auctions, which are generally viewed as short-term liquidity management tools.

In its October policy, RBI had announced an increase in the volume of the 14-day VRRR auction ₹6 crore and 28 day VRRR auction option. “Further, based on evolving liquidity conditions – particularly the quantum of capital inflows, pace of government expenditure and debt offtake – RBI may also consider supplementing the 14-day VRRR auction with the 28-day VRRR auction in a similar calibrated fashion. can do,” the RBI said in its October 8 policy.

While the bond market was expecting a VRRR of 28 days, traders are hardly excited as they believe that it is going to have no effect other than sentiment.

“Till the time the market has the option of 7 days and 14 days VRRR, it is going to be less tender in 28 days VRRR. This will not be effective until RBI closes the 7-day VRRR. This is just a sign that they want to eliminate durable liquidity, said Naveen Singh, Head of Trading, ICICI Securities Primary Dealership.

According to Kaushik Das, Chief Economist, Deutsche Bank, this is the most clear indication from the RBI that the central bank now wants to transition to tackling liquidity management on a sustainable basis, in a sustainable and non-disruptive manner. “It was this intermittent phase that we were waiting for RBI’s signal before closing the reverse repo rate in the policy of 8th December’21. With the longer-term VRRR now operational, we are more confident about our call for reverse repo rate liftoff starting with the December ’21 monetary policy,’ Das said.

Deutsche Bank is expecting a 25 basis point hike in the reverse repo rate to 3.55% in December.

But ICRA has economists like Aditi Nair, chief economist, who believe the monetary policy committee is unlikely to act until next year. “No member of the MPC is showing any readiness to act. We believe that the MPC will look at supply-side factors that are driving inflation, and change the stance only when there is clear evidence of an improvement in demand that is driving prices upward. This is not likely until the policy review of February 2022. Also, RBI may refrain from hike in reverse repo rate till MPC changes its stance to neutral.