RBI's Strategic VRRR Approach: Tackling Surplus Liquidity

The Reserve Bank of India (RBI) is considering a short-tenor variable rate reverse repo (VRRR) auction in the coming days to manage excess liquidity in the banking system, sources said on Wednesday. This move aims to align overnight call money rates more closely to the policy repo rate.

Over recent weeks, systemic liquidity has remained high, with banks parking up to Rs 4.78 lakh crore under the Standing Deposit Facility. This situation reflects limited credit offtake and consistent government expenditure, according to market experts and economists. As a result, overnight market rates have often lingered below the repo rate, prompting the central bank to contemplate active liquidity management strategies.

Market participants suggest that the shorter-tenure VRRR auctions could allow the RBI to fine-tune liquidity conditions effectively. They indicate that such a strategy would not only absorb surplus funds but also provide flexibility to inject liquidity, especially during periods of GST outflows. "RBI will ensure that VRRR will mature before GST payment," Sengupta commented.