The Reserve Bank of India conducted a ₹1.3 trillion bid in its four-day variable rate reverse repo auction, highlighting persistent excess liquidity in the banking system despite measures to align short-term rates with policy targets.
The Reserve Bank of India drew ₹1.3 trillion in bids at its four-day variable rate reverse repo auction on Thursday, taking in less than the ₹1.5 trillion it had on offer as it moved to drain excess cash from the banking system and keep short-term rates closer to its policy stance. Market participants said the operation came after overnight tri-party repo rates slipped below the Standing Deposit Facility rate of 5%, a sign that surplus funds were pressing money market rates lower. The weighted average call rate rose to 5.18% from 5.05% in the previous session after the auction.
Even with the RBI’s intervention, liquidity remained abundant. Latest central bank data showed a surplus of ₹3.44 trillion in the banking system on Wednesday, underscoring the scale of excess funds that had to be managed. A treasury official at a state-owned bank told local media that the central bank wanted overnight rates to stay near the repo rate rather than below the floor of the policy corridor, while a dealer at a private bank said the surplus was likely to prove temporary.
The RBI said in its policy statement on Wednesday that liquidity was expected to stay in surplus through August before easing later. It also reiterated that it would use fine-tuning tools, including VRRR auctions, whenever needed. That fits with the central bank’s broader approach to liquidity management, under which it can absorb funds for short periods without changing its main policy rate.
A VRRR auction is a short-term drain operation in which banks place funds with the RBI at variable rates, giving the central bank more flexibility than the fixed-rate reverse repo window. The latest move follows a period in which overnight borrowing costs had softened enough to prompt intervention. According to market participants, the need for such auctions should diminish if forward book maturities and higher currency leakage reduce the surplus in coming weeks.
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