RBI to conduct seven-day VRRR auction on Friday to mop up liquidity

The average liquidity surplus in the system over the past two weeks-reflected by the daily absorption by the RBI-was around Rs 2.5 trillion

The Reserve Bank of India (RBI) will conduct a 7-day variable rate reverse repo (VRRR) auction worth ₹1 trillion on Friday to suck excess liquidity in the banking system, due to which the weighted average call rate (WACR) is trading below the policy repo rate

 

“On a review of the current and evolving liquidity conditions, it has been decided to conduct a variable rate reverse repo (VRRR) auction on Friday, June 27,” the central bank said on Friday.

 

“Further, on a review of evolving liquidity conditions, it has been decided not to conduct the 14-day main operation on Friday, June 27, 2025, for the ensuing fortnight,” it added.

 

The average liquidity surplus in the system in the last two weeks, indicated by the amount of funds that RBI absorbs every day, was around ₹2.5 trillion.

 

According to RBI’s liquidity framework, liquidity operation of 14 days and above are called main operation, and that of less than 14 days are called fine tuning operations.

 

Money market participants said the RBI’s decision to conduct a VRRR auction was largely in line with expectations, given the persistent surplus liquidity in the banking system despite tax outflows.

 

They said that the weighted average overnight call rate remains well below the repo rate and could have declined further with the onset of government spending at the start of the next month. The net liquidity in the banking system was in a surplus of ₹2.43 trillion as of Monday, latest data by the RBI showed.

 

“The VRRR auction was expected in order to align overnight rates with repo rate. The liquidity is in ample surplus despite around ₹2.5 trillion of outflows due to GST payments and advanced tax payments,” said a money market dealer at a state-owned bank.

 

The weighted average call rate settled at 5.27 per cent on Tuesday. The repo rate currently stands at 5.50 per cent.

 

In an interview to Business Standard last week, RBI governor Sanjay Malhotra had said that though the guiding principle of liquidity management framework of the central bank is to maintain the operating target of monetary policy, i.e., WACR close to the policy repo rate, however, it is not unusual for WACR to trade in the lower segment of the LAF corridor in surplus liquidity conditions.

 

“I would like to emphasise that fine-tuning operations, whether through the VRRR or the VRR, do not impact durable liquidity. As stated earlier, we remain committed to maintain sufficient durable liquidity in the banking system,” Malhotra had said.

 

Bond market participants said that the move might push up the benchmark bond yield by 3-4 basis points. 

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“The VRRR auction was factored in but we were expecting it maybe next fortnight. The auction being conducted this Friday is a bit of a surprise for the market,” said a dealer at a state-owned bank.

 

Since the start of the current calendar year, the RBI was actively infusing liquidity in the banking system via variable rate repo (VRR) auctions, swaps, and open market operations. The RBI introduced daily VRR auctions in response to liquidity tightness stemming from tax outflows and foreign exchange interventions which was withdrawn on June 9.

 

Since January, the RBI has injected ₹9.5 trillion of durable liquidity into the banking system. This infusion helped shift liquidity conditions from a sustained deficit since mid-December to a surplus by end-March.

 

Of the total liquidity injection, ₹5.2 trillion came through open market purchases (including secondary market purchases), while long term VRR auctions and USD/INR buy-sell swaps added ₹2.1 trillion and ₹2.2 trillion, respectively.

 

Additionally, the domestic rate setting panel cut the CRR by 100 basis points to 3 per cent in four tranches starting September. The reduction in CRR is expected to infuse ₹2.5 trillion of primary liquidity in the banking system by the end of November. 

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