RBI Halts Daily VRR Auctions Amid Surplus Liquidity

The Reserve Bank of India (RBI) declared Tuesday that it will cease daily Variable Rate Repo (VRR) auctions starting June 11, 2025. The surplus of liquidity in the banking system has reached roughly Rs 3 lakh crore, prompting this decision.

The central bank stated, "Upon a thorough review of current and evolving liquidity conditions, it has been decided to discontinue the daily VRR auctions effective June 11, 2025, Wednesday." This move was influenced by the subdued demand for daily VRR auctions, with banks placing bids of only Rs 3,711 crore and Rs 3,853 crore on June 9 and 10, respectively, against a notification of Rs 25,000 crore.

Initially rolled out on January 16, 2025, the daily VRR auctions were designed to handle liquidity crunches arising from tax outflows and forex interventions. With the current comfortable liquidity, the RBI now seeks to stabilize overnight money market rates trending lower amid the surplus. Analysts expect the continuation of 14-day VRR auctions to manage short-term liquidity.

Furthermore, the RBI's recent 100 basis point reduction in the Cash Reserve Ratio (CRR) to 3.0 percent is likely to inject Rs 2.5 lakh crore into the system, enhancing liquidity further. The VRR, a tool used by RBI, allows banks to borrow temporarily from the RBI using government securities as collateral. Through an auction, banks bid at varied rates for the desired amount, making the repo rate variable as it's determined via the bidding process.

The RBI's decision aligns with its neutral policy stance, adapting its liquidity tools in response to prevailing market conditions.

(With inputs from agencies.)