Context:
The Reserve Bank of India’s (RBI) 43-day Variable Rate Repo (VRR) auction saw tepid demand, with bids worth ₹25,431 crore received against the notified amount of ₹1.5 trillion. The low demand in the auction reflects a shift in market conditions, particularly the decline in money market rates.
Key Highlights of the VRR Auction
- Tepid Demand: The auction received only ₹25,431 crore in bids, significantly less than the notified ₹1.5 trillion, indicating lower investor interest.
- Reason for Low Demand: Dealers cited that money market rates had fallen below 6%, making it less attractive to pay 6.01% in the VRR auction when overnight rates were trading at 5.80%. This mismatch in rates led to reduced participation.
Liquidity Situation in the Banking System
- The net liquidity in the banking system was in a surplus of ₹1.69 trillion as of April 16, 2025, according to the latest data from the RBI.
- The RBI has already infused ₹3.3 trillion via Open Market Operations (OMO) and ₹2.2 trillion through long-term VRR auctions so far in 2025.
OMO Auction Dynamics
- OMO Purchases: The RBI also conducted an OMO auction, purchasing ₹40,000 crore worth of government securities.
- Auction Cutoff: The cutoff for the OMO auction was set higher than the market price. This reflects market expectations that there might not be further OMO auctions after the RBI dividend is received, leading to profit booking for the first quarter.
- Dealers indicated that the OMO auctions were seen as an opportunity to profit, given the anticipated reduction in future RBI interventions.
Government Bond Market Activity
- The benchmark 10-year government bond yield dropped to its lowest level since December 15, 2021.
- Demand for Bonds: There has been strong demand for government bonds, with traders expecting the benchmark yield to fall to 6.25% by the end of the current quarter.
- Private Banks as Major Buyers: Private banks are the primary buyers, responding to expectations of further rate cuts following the RBI’s 25 basis point (bps) repo rate cut and the shift to an accommodative stance.
The RBI’s VRR auction reflects the current surplus liquidity in the banking system and market conditions where short-term rates are lower than the VRR auction rate. Despite this, strong demand for government securities continues, driven by expectations of future rate cuts and the accommodative stance from the RBI. Traders are actively positioning themselves in anticipation of further policy adjustments, leading to strong demand in gilts and ongoing OMO activity.
