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The Reserve Bank of India (RBI) has announced a three-day variable rate repo (VRR) auction worth INR 1 lakh crore to improve liquidity conditions in the banking system after surplus funds declined sharply in recent weeks. The move comes as GST-related outflows pushed overnight money market rates higher and reduced surplus liquidity levels. The central bank has already conducted multiple VRR auctions this month to ensure stable short-term funding conditions for banks. Despite these measures, recent auctions have seen muted participation from lenders, reflecting cautious liquidity management across the banking sector.
The Reserve Bank of India (RBI) has announced a three-day variable rate repo (VRR) auction worth INR 1 lakh crore to support liquidity conditions in the banking system as surplus funds continue to decline. Advertisement
The auction is scheduled to be conducted on May 22 between 9:30 am and 10 am, while the reversal of funds will take place on May 25, according to an RBI release issued on Thursday. The central bank said the decision was taken after reviewing the current and evolving liquidity situation in the financial system.
The RBI’s move comes at a time when banking system liquidity surplus has narrowed significantly due to GST-related outflows and higher fund absorption from the market. The tighter liquidity environment has also resulted in an increase in overnight money market rates in recent days.
According to RBI data, liquidity surplus in the banking system stood at around INR 1.29 lakh crore as of May 20, compared to nearly INR 2.58 lakh crore recorded at the end of April. The sharp decline reflects the impact of periodic tax payments and temporary cash movement from banks to government accounts.
To manage short-term liquidity and maintain stability in money market rates, the RBI has been actively conducting VRR auctions over the past few weeks. The central bank has already conducted five VRR auctions during May and one at the end of April to inject liquidity into the system.
VRR auctions are commonly used by the RBI to provide short-term funds to banks against government securities at market-linked interest rates. The tool helps ensure adequate liquidity in the banking system without making permanent changes to overall monetary conditions.
However, participation in recent auctions has remained lower than the notified amount despite tighter liquidity conditions. The overnight VRR auction conducted earlier on Thursday received bids worth INR 25,360 crore against the notified amount of INR 1.25 lakh crore. The RBI accepted the entire bid amount at a cut-off rate of 5.26 per cent.
Over the past year, the RBI has used liquidity management measures more actively amid changing banking system conditions, fluctuating deposit growth and evolving credit demand. Market participants have also been closely tracking liquidity trends ahead of upcoming policy signals and borrowing requirements in the financial system.
Source PTI
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