RBI to end daily VRR auctions from June 11 as liquidity improves

With net banking system liquidity in a surplus and muted demand from lenders, RBI discontinues daily Variable Rate Repo auctions introduced in January

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The Reserve Bank of India (RBI) on Monday said it would discontinue daily variable rate repo (VRR) auctions to infuse short-term liquidity in banks from Wednesday.

 

Daily VRR auctions, which inject liquidity into the banking system, were introduced on January 16.

 

The move comes after the RBI reviewed the current and evolving liquidity conditions. The net liquidity in the banking system stood at a surplus of ₹2.45 trillion on Sunday, latest RBI data showed.

 

On Monday, banks bid only for ₹3,711 crore against a notified amount of ₹25,000 crore, reflecting muted demand.

 

The daily VRR auctions were introduced in response to liquidity tightness stemming from tax outflows and intervention in the foreign exchange market. On January 15, the banking system was in a net liquidity deficit of ₹2.22 trillion. The RBI was also conducting long-term VRRs, open market operations (OMO) purchases, and swap auctions in a bid to infuse durable liquidity into the system.

 

As liquidity conditions improved by the beginning of the current financial year, the RBI gradually reduced the size of the daily VRR auctions, followed by a cut in the frequency of 14-day VRR auctions.

 

Discontinuation of the daily VRR auction comes after the central bank cut the policy repo rate by 50 bps on Friday, while changing the monetary policy stance to neutral from accommodative on Friday during the review of the monetary policy. 

 

During the review, the RBI also cut banks’ cash reserve ratio requirement 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 into the system by the end of November.

 

“This goes well with their neutral stance where they said they would act according to the evolving conditions,” said the treasury head at a private bank. “The daily VRRs were for short-term liquidity infusion, which is not required right now,” he added.

 

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

 

The transition was reflected in muted demand for daily VRR auctions and elevated standing deposit facility (SDF) balances, which averaged ₹2 trillion during April-May. Of the total liquidity injection, ₹5.2 trillion came through OMO (including secondary market purchases), while long-term VRR auctions and USD/INR buy-sell swaps added ₹2.1 trillion and ₹2.2 trillion, respectively. Banks park their excess overnight funds with the RBI through the SDF window.

 

“The decision was along expected lines, given the surplus liquidity and the lack of demand at VRR,” said a dealer at a state-owned bank. “The RBI governor said on Friday they would now take decisions according to requirements. We don’t need daily VRRs right now. The CRR cut will suffice for transmission. Government spending will also kick in, which will support liquidity,” he added.