VRR auction by RBI sees weak bank demand for fifth consecutive time

The Reserve Bank of India's variable rate repo auction saw weak demand for the fifth consecutive time, with banks bidding for a lower amount than the notified size.

Demand for the Reserve Bank of India's variable rate repo (VRR) auction remained weak for the fifth consecutive time on Wednesday, despite narrowing surplus liquidity in the banking system and expected outflows from goods and services tax payments.

Banks placed bids for a lower amount against the notified size, reflecting their reluctance to borrow from the central bank even as liquidity conditions tightened, market participants said.

Today, the central bank received bids worth Rs 16,435 crore for five-day VRR auction, on a notified amount of Rs 1.50 lakh crore. The RBI accepted the entire amount at a cut-off rate of 5.26 per cent.

Earlier, the RBI had received bids of Rs 16,005 crore against Rs 1 lakh crore on May 18, Rs 7,190 crore against Rs 50,000 crore on May 12, Rs 10,795 crore against Rs 75,000 crore on May 7, and Rs 25,715 crore against Rs 1 lakh crore on April 30.

During the period, surplus liquidity in the banking system ranged between Rs 2.58 lakh crore and Rs 1.51 lakh crore.

Market participants said that the liquidity is likely to tighten in the coming days after the goods and services tax outflows schedule today, which will put pressure on the overnight rates in the money market.

In a variable rate repo (VRR) auction, banks borrow short-term funds from the RBI at market-determined rates, as opposed to a fixed rate.