RBI conducts VRR Auction to boost liquidity in view tax outflows

RBI conducts VRR Auction to boost liquidity in view tax outflows

Subject :Economy

Section: Monetary Policy

Key Points:

• Banks were facing reduced liquidity owing to advance tax and indirect tax payments.
• The overnight call money rates were above the repo rate of 6.5%.
• RBI conducted a Variable rate repo (VRR) auction for Rs. 75,000 crore and received a good response owing to the liquidity needs of Banks. The final cut-off rate was 6.51%.
• It may be noted that at several of the recent VRR auctions the final off-take is less than that earmarked by RBI.
• RBI conducts VRR auctions periodically for short term liquidity management. The present VRR auction was done in anticipation of tax outflows and tight liquidity.
  • RBI aims that call money rate does not deviate much from the repo rate, presently which is 6.50 per cent.
  • If call money rate falls below repo rate (say 6.25 per cent) the RBI will conduct a Variable Rate Reverse Repo/VRRR auction.
  • If call money rate is above the repo rate (say 6.75 per cent) it will conduct VRR.

• Tri-party repos (TREPs) is a risk-free borrowing and lending of funds against government-issued securities by financial institutions, banks, mutual funds, etc.
• TREPS facilitates borrowing and lending of funds in Triparty Repo arrangement.
• A repo or re-purchase agreement is a liquidity mechanism between two banks. Generally, banks are required to maintain their statutory liquidity ratio (SLR) and cash liquidity ratio (CLR) above certain limits. If there are mismatches, banks can use the repo market to ensure corrections.
• Only G-Secs are dealt with in this system, there is no risk premium. Most of the transactions take place at the repo rate only.
• TREPs require adding a broker between the two parties. The broker (CCIL as the third party) will ensure both legs of the repo go through smoothly, and fix the rates as well.
• TREPs are undertaken through the Clearing Corporation of India Ltd (CCIL), which acts as a counterparty to all trades.
• It is interesting to note that SEBI has mandatorily directed mutual funds to invest at least 5% of their assets in liquid assets, including TREPS.
• The earlier system of CBLO (Collateralised borrowing and lending obligation) was replaced by TREPS in 2018.