RBI's Decision on Variable Rate Repo Auctions

On Tuesday, the Reserve Bank of India (RBI) declared that it will cease daily Variable Rate Repo (VRR) auctions starting June 11, 2025. This decision comes as the banking system experiences a liquidity surplus estimated at around Rs 3 lakh crore.

The RBI stated, "After reviewing the current and evolving liquidity landscape, it has been decided to discontinue daily VRR auctions effective June 11, 2025, Wednesday."

This move follows a lack of interest in the daily VRR auctions, with banks submitting bids of only Rs 3,711 crore on June 9, 2025, and Rs 3,853 crore on June 10, against a notified VRR of Rs 25,000 crore.

The RBI had initiated daily VRR auctions on January 16, 2025, to alleviate liquidity constraints caused by tax outflows and foreign exchange interventions. With liquidity now in a comfortable position, the central bank aims to stabilize overnight money market rates, which are currently declining due to the surplus.

Further Insights

Market analysts anticipate that the 14-day VRR auctions will persist to manage short-term liquidity needs. Furthermore, the RBI's recent reduction of 100 basis points in the Cash Reserve Ratio (CRR) to 3.0% is projected to release Rs 2.5 lakh crore, enhancing liquidity further.

The Variable Rate Repo serves as a mechanism for the RBI to regulate short-term liquidity within the banking sector. Through this tool, banks can borrow funds from the RBI for brief periods by pledging government securities as collateral.

The borrowing interest rate is determined via an auction process, where banks bid for desired amounts at varying rates. The term "variable" refers to the auction-based determination of the rate rather than a fixed one. The RBI utilized the VRR to inject liquidity during periods of tightness. Now, with money market rates declining and banks well-capitalized, the central bank is recalibrating its operations accordingly.

This action reflects the RBI's neutral policy stance and its approach to adjusting liquidity tools in response to market conditions.