RBI Cuts Daily VRR Auction Size By Half As Liquidity Turns Into Surplus

The Reserve Bank of India has decided to cut the daily variable repo rate auction size to Rs 25,000 crore on April 4, from Rs 50,000 crore, the central bank said in a press release.

In order to ease banking system liquidity conditions, the RBI has been conducting daily VRR auctions since Jan. 15.

Now that the system liquidity has turned into surplus thanks to the central bank's various toolkits, it has decided to not conduct a 14-day VRR auction for April 4-17.

On April 2, the banking system liquidity was in surplus of Rs 1.93 lakh crore.

A variable-rate repo auction is a liquidity tool for the central bank, which it uses to inject short-term liquidity into the banking system. Banks borrow funds at a rate determined by the market through an auction process, rather than the fixed repo rate.

On Wednesday, NDTV Profit had reported that the RBI is likely to discuss revisions in the current liquidity management framework on Thursday.

The meeting was to discuss allowing a fixed repo window for bank borrowing and shorter maturity VRR auctions instead of long-term.

Bankers said that this exercise is part of RBI's move to provide liquidity assurance and create credit expansion at a time when economic growth is slowing.

Now there is a discussion that if the bank funding target has to be met, then it should be provided at the policy rate, as it increases certainty of liquidity at a time when there is ambiguity on deposit outflows due to rapid digitisation in India, such as 24x7 payment options.

The RBI’s Monetary Policy Committee will meet on April 9 to announce its next policy statement.