More VRRRs likely as banking system liquidity surplus hits ₹3.31 trn

Despite RBI's VRRR auction, liquidity surplus rose to its highest in weeks, keeping overnight rates near the SDF rate and prompting expectations of further auctions

Net liquidity in the banking system stood at a surplus of ₹3.31 trillion on July 1, the highest since June 13, according to the latest Reserve Bank of India (RBI) data. This is despite the RBI’s recent Variable Rate Reverse Repo (VRRR) auction.

 

The surplus liquidity has kept the overnight weighted average call rate near the Standing Deposit Facility (SDF) rate of 5.25 per cent and below the repo rate of 5.50 per cent. On Wednesday, the weighted average call rate eased further to 5.27 per cent from 5.31 per cent the previous day.

 

Market participants expect the central bank to roll over the seven-day VRRR auction maturing on Friday. The RBI had received bids worth ₹84,975 crore at the last VRRR auction, against a notified amount of ₹1 trillion. “We are expecting another seven-day VRRR on Friday. 

 

After that, the RBI might take a decision depending on the evolving liquidity condition,” said a money market dealer at a state-owned bank who did not wish to be named.

 

The RBI’s VRRR operations aim to absorb surplus liquidity from the system and anchor short-term rates closer to the policy repo rate. However, the persistent surplus suggests that more VRRR auctions may be needed to maintain liquidity near the central bank’s target of 1 per cent of net demand and time liabilities.  

 

Market participants and economists expect the RBI to finetune liquidity conditions through frequent auctions, depending on daily system dynamics.  

 

According to experts, recent government spending may have contributed to the liquidity surplus and pushed overnight rates lower. 

 

While the VRRR remains the RBI’s primary liquidity-management tool, the central bank is expected to scale up the size of these auctions and introduce shorter-tenor operations, such as two- or three-day VRRRs, in addition to the seven-day auctions.

 

“No additional measures appear to be on the table at this stage, but the RBI’s intent seems clear: To prevent tri-party repo (TREP) rates from slipping below the SDF rate. They would not want the call rate to align with the repo rate right now because transmission is still incomplete,” said Gaura Sen Gupta, chief economist, IDFC First Bank.

 

“They will roll over the seven-day VRRR, but the course from here remains uncertain. They might increase the quantum of VRRR. They might also introduce short-term VRRRs, but it remains unclear,” she added.

 

The weighted average TREP rate was trading at 5.14 per cent on Wednesday, down from 5.19 per cent on Tuesday. 

 

Since the start of the calendar year, the RBI had been actively infusing liquidity into the banking system via variable rate repo (VRR) auctions, swaps and open-market operations. Daily VRR auctions were introduced to tackle tight liquidity caused by tax outflows and foreign-exchange interventions, but were withdrawn on June 9.

 

Since January, the RBI has injected around ₹9.5 trillion of durable liquidity into the 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 dollar/rupee buy-sell swaps contributed ₹2.1 trillion and ₹2.2 trillion, respectively.

 

Additionally, the domestic rate-setting panel decided to cut the cash reserve ratio (CRR) by 100 basis points to 3 per cent in four tranches starting September. The CRR reduction is expected to infuse ₹2.5 trillion of primary liquidity into the banking system by the end of November 2025.