RBI Ends Daily VRR Auctions as Liquidity Improves, Injects Rs 9.5 Trillion into Banking System

The Reserve Bank of India (RBI) will discontinue daily Variable Rate Repo (VRR) auctions from June 11, as banking system liquidity has improved significantly. Net liquidity was in a surplus of Rs 2.45 trillion on Sunday. The daily VRR auctions were introduced in response to tight liquidity caused by tax outflows and intervention in the foreign exchange market. Since January, the RBI has injected Rs 9.5 trillion of durable liquidity into the banking system.

Title: RBI Discontinues Daily Variable Rate Repo Auctions Amid Improved Liquidity

The Reserve Bank of India (RBI) has announced that it will discontinue conducting daily Variable Rate Repo (VRR) auctions effective from June 11, citing improved liquidity conditions in the banking system. As of June 8, the net liquidity surplus stood at Rs 2.45 trillion [1].

The decision to discontinue daily VRR auctions comes after the RBI injected a significant amount of durable liquidity into the banking system since January, totaling Rs 9.5 trillion [1]. The daily VRR auctions were initially introduced to address tight liquidity conditions caused by tax outflows and foreign exchange interventions [2].

The move to discontinue daily VRR auctions is part of the RBI's broader strategy to manage liquidity effectively. The central bank has been monitoring the evolving liquidity and financial market conditions and has taken proactive measures to ensure sufficient liquidity is available for the banking system [3].

In addition to discontinuing daily VRR auctions, the RBI has also taken steps to reduce the Cash Reserve Ratio (CRR) by 100 basis points (bps) to 3% of net demand and time liabilities (NDTL) in a staggered manner. This reduction will be carried out in four equal tranches of 25 bps each, with the first tranche taking effect from the fortnight beginning September 6, 2025 [4].

The CRR cut is expected to unlock approximately Rs 2.5 lakh crore of primary liquidity to the banking system by December 2025. This move aims to provide durable liquidity and reduce the cost of funding for banks, thereby facilitating monetary policy transmission to the credit market [4].

The comfortable liquidity surplus in the banking system has reinforced the transmission of policy repo rate cuts to short-term rates, although the RBI notes that the credit market segment has not yet shown a perceptible transmission [3].

The RBI remains committed to monitoring the liquidity situation and will continue to take further measures as warranted to ensure financial stability and support economic growth [3].

References

[1] https://www.business-standard.com/economy/news/india-s-central-bank-to-discontinue-daily-variable-rate-repo-auctions-125060900914_1.html
[2] https://ground.news/article/rbi-discontinues-vrr-auctions-as-liquidity-stabilises
[3] https://www.linkedin.com/posts/ndtvprofit_rbi-discontinues-vrr-auctions-as-liquidity-activity-7337825884499865603-EUNN
[4] https://www.livemint.com/focus/rbi-cuts-crr-by-a-steep-1-pc-to-unlock-rs-2-5-lakh-crore-to-bank-funds-by-dec-1749190281231.html