The Reserve Bank of India (RBI) has stepped up its liquidity mop-up efforts in August, conducting variable rate reverse repo (VRRR) auctions almost daily to manage the ongoing surplus in the banking system. This action aligns with the central bank’s shift away from its previously accommodative monetary policy stance.
On Wednesday, the RBI held two VRRR auctions aimed at absorbing excess liquidity. In the first auction, the central bank received offers totaling Rs 22,882 crore against a notified amount of Rs 50,000 crore, accepting them at a weighted average rate of 6.49%. The second auction saw offers of Rs 7,575 crore against the same notified amount, with acceptance also at a weighted average rate of 6.49%.
Easing liquidity
Liquidity conditions improved significantly in July 2024, with the banking system maintaining a surplus throughout the month. The average daily net liquidity adjustment facility balance hovered around Rs 1.5 lakh crore surplus in the second week of August.
Liquidity are likely to remain in moderate surplus through Q2 FY25, with government spending patterns being crucial for sustainable easing, particularly in Q3 FY25. Improved liquidity will support money market activities in Q2 FY25. Concurrently, a reduction in banking system credit demand is expected to lower the need for certificates of deposits, positively influencing short-term money market rates.
