RBI to withdraw surplus funds to dampen money market's mood

MUMBAI, June 25 (Reuters): The Indian central bank's decision to withdraw surplus liquidity from the banking system just weeks after a large rate cut and cash boosting measures has prompted an uptick in money market rates which may continue in the coming days, traders said.

The Reserve Bank of India (RBI) will conduct a seven-day variable rate reverse repo (VRRR), for 1 trillion rupees ($11.64 billion) on Friday, its first such operation since November-end.

Conducting VRRRs shows the RBI's discomfort with the overnight and treasury bill rates remaining below repo rate.

These are expected to move towards the repo rate as the RBI continues such operations, potentially for shorter tenors.

This would increase the short-term cost of funding for banks, and undo some of the benefits of the rate cut, analysts said.