RBI 7-day variable reverse repo cut-off rate is 5.49%

RBI 7-day variable reverse repo cut-off rate is 5.49%

The Reserve Bank of India (RBI) will conduct a seven-day variable rate reverse repo (VRRR) operation worth ₹2.5 lakh crore on July 2, 2025 [1]. This operation aims to manage the banking system's liquidity surplus and keep overnight rates within the liquidity adjustment facility (LAF) corridor. The operation will be reversed on July 9, 2025.

The VRRR operation involves the RBI absorbing excess liquidity from banks for a fixed duration, typically 7, 14, or 28 days, with the interest rate determined through an auction. The cut-off rate for this operation is 5.49% [1]. This rate is market-driven and is set based on the competitive bids submitted by banks.

The primary objective of the VRRR exercise is to maintain overnight rates well within the LAF corridor, thereby supporting the effective transmission of recent policy rate cuts. The move also aligns with the RBI's operational objective of maintaining system liquidity surplus around 1% of NDTL, which works out to around ₹2.5 lakh crore [1].

Analysts suggest that the RBI's strategy of liquidity withdrawal is likely to keep overnight interbank lending rates between the policy repo rate and the floor of the policy corridor, aiding policy transmission. Despite a rising liquidity surplus, the RBI has absorbed funds via the VRRR operation [3].

The VRRR operation does not permanently remove liquidity but increases the cost of liquidity, thus pushing up overnight rates. This can have implications for the money market, bond market, and the banking sector. For instance, it can lead to tighter liquidity, pushing up short-term rates like the call money and TREPS rates. It can also raise short-term bond yields, making borrowing costlier for the government and corporates. However, it offers banks a higher return on surplus funds, enhancing profitability, although it temporarily locks funds, potentially limiting their availability for lending and investment [2].

The weighted average call (WACR) and weighted average tri-party repo rates (WATR) dipped this week as India's liquidity surplus hit a three-year high at more than 4 trillion rupees. On July 2, the weighted average call rate rose 5 bps to 5.30%, while the weighted average tri-party repo was at 5.23%, up 11 bps [3].

The RBI's measured approach to withdrawing banking system liquidity will likely keep overnight interbank lending rates between the policy repo rate and the floor of the policy corridor, analysts said, allowing some policy transmission. The central bank cut its policy rate by a steeper-than-expected 50 basis points last month, shifted its stance to 'neutral', and halted liquidity infusions. It resumed absorption operations on June 27 after overnight rates fell below the policy corridor [3].

References:

[1] https://m.economictimes.com/markets/stocks/news/rbi-to-conduct-7-day-vrrr-for-rs-2-5-lakh-crore-today/articleshow/122375790.cms
[2] https://www.insightsonindia.com/2025/07/05/variable-rate-reverse-repo-vrrr/
[3] https://m.economictimes.com/news/economy/policy/india-central-banks-operations-to-keep-overnight-rates-within-policy-corridor-analysts-say/articleshow/122244269.cms