RBI’s ₹1 Lakh Crore Auction: A Curveball for Rate Cut Hopes

The Reserve Bank of India just announced a ₹1 lakh crore Variable Rate Reverse Repo (VRRR) auction, and it has the financial world talking. This is the first time since last November that the RBI is doing such a large-scale operation, and it’s happening because banks have a lot of extra cash right now—over ₹2.4 lakh crore, to be exact.

 

Here’s what’s going on:

 

The RBI wants to soak up some of this surplus money from the banking system, so it’s offering a seven-day VRRR auction on June 27.

 

By pulling out this extra cash, the RBI is hoping to keep short-term interest rates, like the Mumbai Interbank Offer Rate (MIBOR), closer to its policy rate. Right now, those rates have been slipping a bit lower than the RBI would like.

 

What’s interesting is that this move comes right after a recent rate cut, which has left a lot of people scratching their heads. Usually, you’d expect the RBI to let liquidity stay loose after a cut, not tighten it up.

 

Analysts are now wondering if this means the RBI is less likely to cut rates again soon. The central bank seems to be focused on keeping money market rates from drifting too far below its target.

 

The RBI also skipped its usual 14-day liquidity operation this time, choosing instead to focus on this shorter, targeted auction.

 

People in the market will be watching closely to see if the RBI repeats this move, especially as government spending and other factors could change the liquidity picture in the coming weeks.

 

Source: Moneycontrol, Business Standard, Economic Times, Hindu BusinessLine