The Reserve Bank of India will conduct an overnight variable rate reverse repo (VRRR) auction for up to ₹5 lakh crore on Tuesday, September 8, as it steps up short-term liquidity absorption amid a sizeable surplus of funds in the banking system.
The one-day auction will be conducted between 9:30 am and 10 am, with the funds scheduled to be returned to banks on Wednesday, September 9, the central bank said.
The operation is aimed at managing excess short-term liquidity and keeping overnight money-market rates better aligned with the RBI‘s policy repo rate.
The announcement comes after banks placed ₹3.53 lakh crore with the RBI in an overnight VRRR auction on Monday, against a notified amount of ₹5 lakh crore. The central bank accepted the entire amount at a cut-off and weighted average rate of 5.24%, just one basis point below the prevailing policy repo rate of 5.25%.
The strong participation points to substantial surplus liquidity in the banking system and explains the RBI’s decision to continue with large overnight absorption operations.
Under a VRRR auction, banks and other eligible participants with surplus funds bid to lend money to the RBI for a specified period. Unlike the Standing Deposit Facility, where surplus funds can be parked with the central bank at a fixed rate, the interest rate in a VRRR is determined through an auction.
RBI Standing Deposit Facility rate
The RBI’s Standing Deposit Facility rate currently stands at 5%, 25 basis points below the 5.25% repo rate, while the Marginal Standing Facility rate is at 5.50%.
For banks holding excess overnight cash, a VRRR can therefore offer a return closer to the repo rate. For the RBI, the operation provides a mechanism to temporarily withdraw liquidity and prevent an abundance of cash from pulling short-term market rates substantially below the policy rate.
The central bank uses variable-rate repo and reverse-repo operations as fine-tuning instruments to manage day-to-day liquidity conditions and improve the transmission of monetary policy. RBI’s liquidity framework envisages the policy repo rate at the centre of the interest-rate corridor, with the SDF forming the floor and the MSF the upper bound.
Tuesday’s ₹5 lakh crore notified amount represents the maximum that the RBI is prepared to absorb and does not necessarily mean the full amount will be taken out of the system. The actual quantum will depend on bids submitted by eligible market participants.
The latest auction is also temporary in nature. Funds accepted on Tuesday will return to the banking system the following day, distinguishing the operation from measures designed to make a more durable change to system liquidity.
For financial markets, the immediate impact is likely to be concentrated at the short end of the money market. Continued large-scale VRRR operations could help firm up overnight rates and keep them closer to the 5.25% repo rate.
The auction results — particularly the amount offered by banks and the weighted average rate — will provide a fresh indication of the extent of surplus liquidity in the banking system.
The RBI said the existing operational guidelines governing VRRR auctions will continue to apply.
