Why RBI's ₹7L crore VRRR auction on Monday matters
What's the story
The Reserve Bank of India (RBI) has announced that it will conduct a ₹7 lakh crore variable rate reverse repo (VRRR) auction on September 7. The auction will be held between 9:30am and 10:00am. The funds parked with the central bank during this period will be returned on October 7. This move is part of the RBI's effort to assess current and emerging liquidity conditions in the economy.
Auction details
What is the VRRR auction?
The VRRR auction is a mechanism used by the RBI to absorb excess funds from the banking system for a specified period.
In this case, banks will be able to park their surplus liquidity with the central bank for 30 days. This longer tenor is different from previous operations where shorter durations were used.
The RBI has also given participating banks an option of premature reversal before maturity.
Reversal procedure
Premature reversal option available
Banks can submit requests for premature reversal through the RBI's E-Kuber portal between 9:00am and 5:00pm on working days in Mumbai.
Once a request is made, settlement will take place at the start of the next working day.
The principal amount along with interest accrued for the period will be credited to the bank's current account with the RBI.
This facility is available up to at least two working days before maturity date (October 7).
Capital influx
Liquidity surplus in banking system
The banking system is currently witnessing a liquidity surplus due to the concessional swap facility provided by RBI.
This was done to encourage banks to mobilize foreign currency non-resident (bank) deposits of 3-5 years duration, as part of its efforts to attract foreign capital.
Under this facility, banks swapped dollar inflows via FCNR(B) deposits with RBI and received their rupee equivalent in return.
Liquidity status
Banking system surplus expected to reach ₹12L crore
As of September 3, the banking system had a surplus of ₹10.31 lakh crore, according to RBI data. This is expected to increase further to around ₹12 lakh crore by September 11.