RBI's Variable Rate Reverse Repo (VRRR) Auction

The Reserve Bank of India (RBI) has announced its decision to conduct a 7-day VRRR auction worth ₹1 trillion to manage the excess liquidity in the banking system.

Current Liquidity Conditions

• The weighted average call rate (WACR) is trading below the policy repo rate due to surplus liquidity.
• The average liquidity surplus in the system over the last two weeks was around ₹2.5 trillion.
• Net liquidity in the banking system was in a surplus of ₹2.43 trillion as of the latest data.

RBI's Liquidity Framework

• Operations of 14 days and above are termed as main operations.
• Operations of less than 14 days are called fine-tuning operations.

Market Participants' Views

• The VRRR auction aligns with expectations due to persistent surplus liquidity despite tax outflows.
• The weighted average overnight call rate is below the repo rate, with potential declines expected.
• A dealer noted a potential rise in the benchmark bond yield by 3-4 basis points due to this move.

RBI's Liquidity Management

• RBI Governor Sanjay Malhotra emphasized maintaining WACR close to the policy repo rate.
• Fine-tuning operations like VRRR do not impact durable liquidity.

Recent Liquidity Infusions

• RBI injected ₹9.5 trillion of durable liquidity since January through various mechanisms.
• This included ₹5.2 trillion from open market purchases and significant contributions from VRR auctions and swaps.
• The CRR was reduced by 100 basis points, expected to infuse ₹2.5 trillion of primary liquidity by November.