RBI To End Daily VRR Auctions From THIS Date Amid Liquidity Surplus

The RBI had introduced daily VRR operations on January 16, 2025, to address liquidity tightness arising from tax-related outflows and foreign exchange interventions

The Variable Rate Repo is one of the central bank's tools for managing short-term liquidity

Source : PTI

The Reserve Bank of India (RBI) announced on Tuesday that it will cease conducting daily Variable Rate Repo (VRR) auctions from June 11, 2025. The decision comes in response to a substantial surplus in banking system liquidity, which has now crossed Rs 3 lakh crore.

“Further, on a review of current and evolving liquidity conditions, it has been decided that the daily VRR auctions, as announced in the above press release, will be discontinued with effect from June 11, 2025, Wednesday,” the central bank stated in its announcement.

The RBI had introduced daily VRR operations on January 16, 2025, to address liquidity tightness arising from tax-related outflows and foreign exchange interventions. However, with those pressures easing and liquidity now in surplus, the need for such daily interventions has diminished.

Declining Bank Participation In VRR

The central bank’s move follows a sharp decline in demand for daily VRR funds. On June 9 and 10, banks bid for only Rs 3,711 crore and Rs 3,853 crore, respectively, against a notified auction size of Rs 25,000 crore on both days. This tepid participation signaled a waning appetite for short-term borrowing from the RBI under this mechanism.

While the daily VRRs are being phased out, market watchers expect that 14-day VRR auctions will continue, offering the RBI flexibility in managing short-term liquidity fluctuations.

CRR Cut Supports Liquidity Landscape

Adding to the liquidity comfort, the RBI recently announced a 100 basis point cut in the Cash Reserve Ratio (CRR), bringing it down to 3.0 per cent. This adjustment is anticipated to release approximately Rs 2.5 lakh crore into the banking system, further easing funding conditions.

Understanding The VRR Mechanism

The Variable Rate Repo is one of the central bank's tools for managing short-term liquidity. Under this system, banks borrow funds from the RBI by pledging government securities, with the interest rate determined via an auction process. This "variable" rate reflects market demand rather than a predetermined level.

Initially used to inject liquidity during tighter conditions, the VRR has become less critical as the money market now reflects ample surplus and softening overnight rates. The RBI’s latest step aligns with its neutral policy stance and underscores its commitment to adjusting liquidity operations in line with evolving market dynamics.