RBI Announces ₹2 Lakh Crore VRRR Auction To Absorb Excess Liquidity

The Reserve Bank of India (RBI) will conduct a variable rate reverse repo (VRRR) auction worth ₹2 lakh crore on Friday to absorb excess liquidity from the banking system. The funds will be reversed on 17 April.

The move comes at a time when surplus liquidity in the banking system remains elevated. Liquidity surplus stood at ₹4.55 lakh crore as of Thursday, or about 1.8% of total deposits.

Bond Market Reaction

Bond markets reacted soon after the announcement. The 10-year benchmark yield rose as much as 4 basis points to 7.001%, reversing an earlier decline during the session. At 01:27 pm, the yield stood at 6.979%.

Liquidity Remains Elevated

The central bank’s action signals a step to manage durable liquidity in the system. Surplus liquidity has stayed above comfort levels in recent weeks. Data shared by the RBI Governor Sanjay Malhotra earlier this week showed that the average daily liquidity surplus stood at ₹2.3 lakh crore since the March monetary policy meeting.

Malhotra said after the policy decision on Wednesday that the central bank will ensure enough liquidity to meet the needs of the economy. He added that the RBI would remain proactive and take steps in advance to manage liquidity conditions.

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Shift In Liquidity Management Framework

The current auction also reflects changes made last year to the RBI’s liquidity framework. The central bank last year discontinued the 14-day variable rate repo (VRR) and VRRR operations as the main tools for managing short-term liquidity. Instead, it shifted to a more flexible system.

Under the new system, the RBI mainly uses 7-day VRR and VRRR auctions to handle liquidity. It also runs shorter or slightly longer auctions, from overnight up to 14 days, based on what the system needs.

Sources:

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