RBI to discontinue daily variable rate repo auctions, surplus liquidity in the banking system.

The Reserve Bank of India (RBI) will discontinue daily variable rate repo auctions from June 11, citing surplus liquidity in the banking system. The auctions were introduced to support banks against liquidity deficits, but with a daily average surplus of ₹2.75 lakh crore, the need for additional liquidity injection is no longer necessary. The change in monetary policy stance to 'neutral' and rising yields on benchmark paper have contributed to negative sentiment in the bond market.

The Reserve Bank of India (RBI) will discontinue daily variable rate repo (VRR) auctions from June 11, citing surplus liquidity in the banking system. The auctions were introduced in January 2025 to support banks against liquidity deficits, but with a daily average surplus of ₹2.75 lakh crore, the need for additional liquidity injection is no longer necessary [1]. The decision aligns with the RBI's target of maintaining surplus liquidity near 1% of net demand and time liabilities (NDTL) [3].

The RBI had introduced daily VRR auctions to stabilize liquidity, but the system has since experienced a sustained surplus. This surplus has stabilized the Weighted Average Call Rate (WACR), which now hovers near the RBI's reverse repo rate of 5.15%, down from peaks of 6.84% earlier in 2025 [2]. The decision to discontinue the auctions reflects the RBI's success in transforming a tight liquidity environment into a surplus, driven by reduced foreign exchange interventions and improved statutory reserve management [2].

The discontinuation of VRR auctions signals a shift in India's liquidity management framework. With the banking system operating in a surplus of ₹2.45 trillion, this move opens opportunities in fixed income markets and financial stocks. Long-dated government bonds are expected to benefit from the stable liquidity environment, as short-term rates are anchored and the yield curve could widen further [2].

Banks stand to benefit from the surplus liquidity, with reduced reliance on expensive short-term borrowing potentially boosting net interest margins (NIMs) and driving loan growth in sectors like infrastructure and retail [2]. However, risks remain, including foreign exchange volatility and deposit outflows [2].

Investors should consider overweighting long-dated government bonds and investment-grade corporate debt, while avoiding short-term paper. In the equities market, overweighting Nifty Bank Index constituents, particularly banks demonstrating robust NIMs and asset quality, is advisable. Hedging strategies, such as using USD/INR futures, should be employed to mitigate forex risks [2].

In conclusion, the RBI's exit from VRR auctions marks a significant shift in liquidity management, reflecting the banking system's transition to a stable, surplus environment. While risks remain, the surplus liquidity offers opportunities for investors in fixed income and financial stocks.

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://www.ainvest.com/news/india-liquidity-shift-golden-era-long-dated-bonds-financial-stocks-2506/
[3] https://m.economictimes.com/industry/banking/finance/banking/from-wednesday-banks-cant-queue-up-daily-to-borrow-from-rbi/articleshow/121736626.cms