By Dharamraj Dhutia
       MUMBAI, Dec 27 (Reuters) - 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)


 (Reporting by Dharamraj Dhutia; Editing by Savio D'Souza and
Mrigank Dhaniwala)