RBI drains 2.00 trillion rupees via 7-day reverse repo auction

RBI drains 2.00 trillion rupees via 7-day reverse repo auction

The Reserve Bank of India (RBI) conducted a seven-day Variable Rate Reverse Repo (VRRR) auction on Friday, July 18, 2025, to absorb Rs 2.00 trillion from the banking system. This move is part of the central bank's strategy to manage surplus liquidity and anchor short-term rates closer to the policy repo rate.

The auction comes amidst a backdrop of a significant net liquidity surplus in the banking system. As of Wednesday, the net liquidity stood at Rs 3.11 trillion, according to the latest RBI data [1]. The central bank has been conducting VRRR auctions to absorb excess liquidity, with the latest auction being one of the largest in recent times.

The VRRR auction on Friday was aimed at draining Rs 2.00 trillion, which is expected to align overnight rates with the repo rate. Despite the significant surplus, banks were reluctant to lock in more funds, as they had already parked Rs 1.5 trillion at the previous seven-day VRRR auction [1]. Additionally, the upcoming Goods and Services Tax (GST) outflows were expected to further influence the liquidity situation.

The overnight Weighted Average Call Rate (WACR) and Tri-party Repo (TREPS) rates have been slipping below the Standing Deposit Facility (SDF) rate of 5.25% and the repo rate of 5.50%, respectively. The WACR settled at 5.35% on Thursday, while the TREPS rate was unchanged at 5.28% [1]. These rates are key indicators of the banking system's liquidity conditions and are closely monitored by the RBI.

The VRRR operations are crucial for the RBI in managing liquidity and maintaining monetary policy objectives. By conducting these auctions, the central bank aims to stabilize short-term rates and ensure that the banking system operates efficiently. The latest auction is part of a series of measures taken by the RBI to manage the surplus liquidity in the system.

The auction results indicate that the RBI's efforts to drain liquidity from the system are having an impact. However, market participants remain cautious due to the upcoming debt sale and the higher quantum of reverse repo from the RBI [2]. The central bank's actions are expected to influence bond yields and overnight rates in the coming weeks.

In summary, the RBI's seven-day VRRR auction to absorb Rs 2.00 trillion is a significant step in managing surplus liquidity and aligning short-term rates with the policy repo rate. The auction reflects the central bank's commitment to maintaining monetary policy stability and ensuring the efficient functioning of the banking system.

References:
[1] https://www.business-standard.com/economy/news/rbi-to-hold-7-day-vrrr-auction-to-absorb-rs-2-trillion-on-friday-125071701496_1.html
[2] https://www.ainvest.com/news/rbi-drains-2-00-trillion-rupees-7-day-reverse-repo-auction-2507/