➡On Friday we saw significant demand for cash in VRR auction.
➡Demand was 2.4 times than the liquidity provided through VRR auction
➡Cut off & Weighted Average Rate went up by 7bps as compared to previous VRR auction and was 18bps – 20bps above repo rate respectively which hints on the extreme tight liquidity condition which is anyways evident from increasing MSF borrowings from ₹36,142Cr (on the previous VRR auction day) to ₹195948Cr (as on Thursday) which was majorly due to combined effect advance tax & GST outflows. (I had mentioned about it in my 1st post after 1st announcement of 7D VRR -1Tn).
What would be Liquidity Condition Going Ahead?
➡Please note, RBI’s intention is not to take liquidity into surplus but to support borrowers in the extreme tight liquidity condition as the case is on Friday.
➡Liquidity will continue to remain tight even in coming days as liquidity provided will be mostly benefitting the borrower & partially to depositors and it is expected be in surplus only when borrowings are lesser than the deposits which is not the scenario RBI want.
➡Secondly, when we know already the excess demand 2.5Tn fund remained unfulfilled, so they will find their way through MSF borrowing for the days to come.
➡Liquidity support through VRR helps to provide the liquidity to the borrowers but lead to increase in the net liquidity deficit as it helps borrowers & not depositors, & net liquidity could be in surplus only when deposits are higher than the borrowings which is not the ideal condition in the current inflationary environment which RBI expects
