RBI Launches ₹1 Trillion Two-Day VRRR Auction to Manage Excess Liquidity
The Reserve Bank of India (RBI) will conduct a two-day Variable Rate Reverse Repo (VRRR) auction on Wednesday, aiming to absorb ₹1 trillion from the banking system amid a persistent liquidity surplus.
As of Monday, system liquidity stood at ₹3.4 trillion, even after two recent seven-day VRRR operations. The surplus has driven the overnight weighted average call rate (WACR)—the key operating target of monetary policy—close to the Standing Deposit Facility (SDF) rate of 5.25%, remaining well below the repo rate of 5.50%.
🔍 RBI Moves Early to Anchor Short-Term Rates
According to Gaura Sen Gupta, Chief Economist at IDFC FIRST Bank:
“System liquidity is expected to rise further due to government expenditure and the upcoming CRR cut in September, which could push surplus liquidity to ₹5 trillion by year-end. This auction is a pre-emptive step to keep overnight rates within the policy corridor.”
Sen Gupta added that this short-term liquidity absorption move aims to shift the WACR closer to the repo rate and push the tri-party repo (Trep) rate—which has been lagging—above the SDF.
The upcoming 100 bps CRR cut is set to inject ₹2.5 trillion into the banking system, intensifying the need for proactive liquidity management.
📉 Overnight Rates and Market Sentiment
On Tuesday:
- WACR closed at 5.26%
- Trep rate stood at 5.13%
Banking analysts believe the two-day VRRR auction will garner strong demand from banks, especially as short-tenure liquidity operations remain attractive during surplus phases.
“Short-duration VRRRs like this help the RBI maintain liquidity discipline without overly draining the surplus,” noted V R C Reddy, Head of Treasury at Karur Vysya Bank.
📊 Strong Market Response Expected
At the RBI’s previous seven-day VRRR auction on Friday, the central bank received ₹1.7 trillion in bids, accepting ₹1 trillion at a cut-off rate of 5.47%.
Experts say the liquidity glut is being driven by a combination of higher government spending and lower-than-anticipated GST collections, softening the usual liquidity constraints.
Given the RBI’s recent CRR cut, analysts believe its liquidity management toolkit is now more dependent on VRRR auctions, with other options offering limited room for further action.
