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The Reserve Bank of India's (RBI) infusion of 500 billion rupees ($6 billion) through a two-day variable rate repo on Wednesday saw strong demand from banks, boosting hopes of more short-term cash infusions through March.

India's banking system liquidity deficit widened to the highest level in nearly eight years this week. Wednesday's repo, through which the RBI lends funds to banks, saw bids worth 1.58 trillion rupees.

"Shortage of funds will only get exaggerated in the last quarter (of the fiscal year), which ideally also sees the strongest credit growth," a senior treasury official at a private bank said. "We expect frequency of such repos to increase."

Banking system liquidity typically tightens in January-March as people withdraw cash from banks.

"In case, balance of payments surplus is small in Q4, then RBI will need to take further measures to address tightness in liquidity conditions," IDFC First Bank's economist Gaura Sen Gupta said. She expects longer tenor repo auctions.

A Prasanna, head of research at ICICI Securities Primary Dealership, also believes the RBI will have to rely more on repos in the next quarter. It may conduct shorter-term repos and keep rolling them over, he added.

Despite the liquidity infusion, overnight rates are above the marginal standing facility rate of 6.75%, which is the upper end of the monetary policy rate corridor.

The weighted average interbank call money rate was at 6.84% on Wednesday, while the weighted average triparty repo rate was at 6.78%.

List of recent VRRs conducted, amid strong response from banks:

Date Tenor Cutoff Amount in Bids in Bid/cover

in % bln rupees bln rupees ratio

15-Dec 7-day 6.61 1000 2734 2.73

22-Dec 7-day 6.68 1750 4252 2.32

27-Dec 2-day 6.71 500 1584 3.17

($1 = 83.3200 Indian rupees)