The Reserve Bank of India (RBI) will conduct a Variable Reverse Repo Rate (VRRR) auction on June 27. It plans to absorb 1 trillion from the banking system. This isn’t just a routine liquidity operation. It signals a clear shift in the RBI’s monetary approach.
Surplus liquidity in the banking system has surged. Daily excess averages over 2.7 trillion. That’s far above the RBI’s comfort zone. As a result, overnight call rates have dropped below the central bank’s key policy rate.
Call rates matter. They reflect how much banks pay to borrow from each other overnight. When they stay too low, it weakens the impact of RBI’s policy rate. This is where the VRRR tool steps in.
Through VRRR, RBI absorbs surplus funds. Banks bid to park their extra cash with the central bank. The interest rate is decided via bidding. Unlike fixed reverse repo, VRRR gives RBI flexibility and pricing power.
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By pulling out 1 trillion, the RBI wants to lift short-term rates. This narrows the gap between the call rate and the repo rate (6.5%). The move makes the policy rate more effective.
It also sends a signal: liquidity will not stay loose for long. For banks, this could raise short-term funding costs. For borrowers, it might slightly tighten loan pricing especially in the short term.
This move isn’t just about technical adjustments. It’s a shift toward liquidity normalisation. With inflation pressures looming and global rates high, the RBI is preparing early.
More such auctions may follow if liquidity stays elevated. The June 27 operation sets the tone — and possibly a new policy direction.
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