RBI infuses ₹82650 crore into banking system via VRR auction

RBI infuses ₹82650 crore into banking system via VRR auction

Subject :Economy

Section: Monetary Policy

Context: The Reserve Bank of India (RBI) infused liquidity amounting to ₹82,650 crore into the banking system on Friday via the 14-day Variable Rate Repo (VRR) auction amid tightening liquidity.

Against the notified ₹1 lakh crore under the VRR auction, banks borrowed ₹82,650 crore at a weighted average rate of 6.53 per cent.

At February 8th bi-monthly monetary policy review, RBI Governor Shaktikanta Das noted that in the period ahead, while higher government expenditure and the anticipated return of forex inflows are likely to augment systemic liquidity, it would get modulated by the scheduled redemption of LTRO and TLTRO (Targeted LTRO) funds during February to April 2023.

Concept:

Long Term Reverse Repo Operation (LTRO)

• LTRR is one of the instruments to manage durable liquidity under the RBI’s revised liquidity management framework. It has a tenor of over 14 days Banks’ prefer investing in treasury bills of 91 days, 182 days and 364 days duration as the bills can be easily liquidated to fund future demand for loans. However, if they invest in LTRR, this flexibility will not be available.
• Long Term Reverse Repo Operation (LTRO) is a mechanism to facilitate the transmission of monetary policy actions and the flow of credit to the economy. This helps in injecting liquidity in the banking system.
• Funds at LTRO are provided at the repo rate. The banks can avail one year and three-year loans at the same interest rate of one day repo. The loans with higher maturity period (here like 1 year and 3 years) will have a higher interest rate compared to short term (repo) loans.
• LTROs are conducted on Core Banking Solution (E-KUBER) platform. The operations would be conducted at a fixed rate.
• The minimum bid amount would be Rs 1 crore and multiples thereof. There will be no restriction on the maximum amount of bidding by individual bidders.
• The Variable Repo Rate (VRR) auction is usually undertaken to withdraw excess liquidity from the system. It is done to tackle inflation. A reverse repo is a fixed or variable interest rate at which banks lend to RBI.

Operational Guidelines For VRR Auction

• The auction will be conducted on CBS (e-Kuber) platform.
• The minimum bid amount for the auction would be Rupees one crore and multiples thereof. The allotment would be in multiples of Rupees one crore.
• Banks would be required to place their bids in percentage terms up to two decimal places. Banks can place multiple bids.
• Successful bids will get accepted at their respective bid rates.
• Bids at or below the repo rate will be rejected.
• Once the bidding time is over, all the bids would be arranged in descending order of the rates quoted and the cut-off rate would arrive at the rate corresponding to the notified amount of the auction. Successful bidders would be those who have placed their bids at or above the cut-off rate. All bids lower than the cut-off rate would be rejected.
• There will be the provision of pro-rata allotment should there be more than one successful bid at the cut-off rate.
• RBI will, however, reserve the right to (i) inject a marginally higher amount than the notified amount due to rounding effects and (ii) inject less than the notified amount without assigning any reasons therefor.
• The reversal of the above auction would take place at the ‘start of day’ on the date of reversal.
• The eligible collateral and the applicable haircuts will remain the same as for LAF.
• All other terms and conditions as applicable to LAF operations will also be made applicable to the above auction mutatis mutandis. These conditions will, however, be subject to review on a periodic basis.