RBI To Hold Seven-Day VRRR Auction As Liquidity In Comfortable Surplus

The Reserve Bank of India has decided to conduct a seven-day variable rate reverse repo auction on Friday in a move that will drain liquidity from the banking system.

The central bank will conduct a seven-day VRRR auction worth Rs 1 lakh crore from 10–10:30 a.m. and the reversal date will be July 4, according to a press release by the central bank on Tuesday.

In VRRR auctions, the RBI absorbs excess liquidity from the banking system. Banks deposit surplus funds with the RBI through auctions and the interest rate is determined by competitive bidding, usually close to or above the reverse repo rate.

The move comes as liquidity in the banking system was in surplus mode of Rs 2.43 lakh crore as on June 23.

The central bank has also decided to do away with its 14-day main VRR auctions on Friday.

At the start of 2025, the RBI had been actively conducting daily and longer-tenor VRR auctions to inject short-term liquidity, responding to a period of tightness caused by tax outflows and heavy forex interventions.

These auctions allowed banks to borrow funds at market-determined rates, helping to stabilise overnight rates and ease funding pressures.

By April, the RBI began scaling back VRR operations as liquidity conditions improved. The daily VRR auction size was halved and the central bank skipped its 14-day VRR auction for several consecutive fortnights, citing a review of 'evolving liquidity conditions'.

The reason to now conduct VRRR auctions also aligns with the central bank's move earlier this month when it had announced a 100-basis-point cut in the cash reserve ratio to 3%. This will inject Rs 2.5 lakh crore of durable liquidity into the system and will be implemented in four tranches by the end of December.

With liquidity now in comfortable surplus, the RBI no longer needs to rely on frequent VRR auctions to inject funds and can use VRRR auctions to manage liquidity.