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The Reserve Bank of India (RBI) announced on Tuesday that it will discontinue daily Variable Rate Repo (VRR) auctions starting June 11, 2025.
The discontinuation of the VRR is due to a liquidity surplus in the banking system reaching approximately Rs 3 lakh crore. RBI said, "Further, on a review of current and evolving liquidity conditions, it has been decided that the daily VRR auctions, as announced in the above press release, will be discontinued with effect from June 11, 2025, Wednesday". This decision follows muted demand for daily VRR auctions, with banks bidding only Rs 3,711 crore on June 9, 2025 and Rs 3,853 crore on June 10 against a notified VRR of Rs 25,000 crore. The RBI introduced daily VRR auctions on January 16, 2025, to address liquidity tightness caused by tax outflows and forex interventions. With liquidity now comfortable, the central bank aims to stabilise overnight money market rates, which are trending lower due to the surplus. Market participants expect 14-day VRR auctions to continue to manage short-term liquidity. Additionally, the RBI's recent 100 basis point cut in the Cash Reserve Ratio (CRR) to 3.0 per cent is expected to release Rs 2.5 lakh crore, further supporting liquidity. Variable Rate Repo is a tool used by the RBI to manage short-term liquidity in the banking system. Under this, banks can borrow money from the RBI for a short period by offering government securities as collateral. The interest rate for borrowing is decided through an auction, where banks bid for the amount they want at different rates. The rate is "variable" because it is determined by the auction rather than being fixed. The RBI used the VRR to inject liquidity into the system during tight liquidity conditions. Now, with money market rates trending lower and banks flush with funds, the central bank is adjusting its operations accordingly. This step aligns with the RBI's neutral policy stance and its strategy to adjust liquidity tools in line with market conditions. (ANI)
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