RBI to conduct Rs 1 lakh-crore VRRR today to align market rates

Mumbai: The Reserve Bank of India (RBI) will conduct a fine-tuning, two-day variable rate reverse repo (VRRR) operation on Wednesday for ₹1 lakh crore. The aim of the exercise is to align the weighted average call rate (WACR) and the TREPS rate within the liquidity adjustment facility (LAF) corridor, economists said.

VRRR does not permanently remove liquidity, but increases cost of liquidity, thus pushing up overnight rates.

The operations planned for Wednesday will be reversed on July 11, Friday.

After the banking system liquidity turned into a significant surplus of ₹4.25 lakh crore on July 4, the WACR dipped to an average of 5.16% in July so far. The WACR was at 5.26%, while the TREPS rate was at 5.13% on Tuesday, CCIL data showed.

TREPS stands for treasury bills repurchase agreement and participants include mutual funds and insurance companies, along with banks.

The wider participant mix pushes yields down in the TREPS segment. The call market has only banks as participants.

"The intent of the VRRR will likely be to make sure that the TREPS rate does not fall below the standing deposit facility (SDF) rate, rather than getting the call rate to repo," said Gaura Sen Gupta, chief economist of IDFC First Bank. The average TREPS rate is at 5.07% in July so far.