The Reserve Bank of India will no longer implement the Variable Rate Repo from June 11, 2025, due to an excessive liquidity stockpile in the banking system.
Here's a fresh take on the RBI's decision to ditch Variable Rate Repo auctions:
The Reserve Bank of India (RBI) has axed the daily Variable Rate Repo (VRR) auctions, effective from June 11, 2025, due to an overwhelming liquidity surplus in the banking system. The pantry's overflowing cookie jar is estimated to hold around ₹3 lakh crore as of early June 2025.
Why the axe, you ask? well, the RBI decided that temporary liquidity support through daily VRR auctions is no longer necessary, as the banking system is sailing on calm waters. And let's face it, who needs a life jacket when the seas are tranquil, right?
The RBI introduced the VRR auctions in January 2025 to stave off short-term liquidity tightness resulting from tax outflows and forex adventures. But with market conditions improving, the central bank has decided to adjust its operations accordingly.
Market participants predict that 14-day VRR auctions will continue to manage short-term liquidity, but let's keep our fingers crossed and see how that pans out.
Oh, and did you hear about the RBI's recent dust-off of the Cash Reserve Ratio (CRR)? A 100 basis point cut to 3.0 per cent is expected to release an additional ₹2.5 lakh crore, adding more fuel to the liquidity fire.
So, there you have it! The RBI's decision is all about surplus liquidity, stable conditions, and a little dancing with the Cash Reserve Ratio. The move is part of the RBI's grand plan to adjust its liquidity tools to fit the ever-changing market conditions. It's a game of musical chairs, and for now, the banking system has grabbed a chair. But who knows, the music might change again, and this dance could heat up! (This story has been syndicated; the content hasn't been edited by our house elves)
Bonus Insights:
- The RBI's liquidity surge surpasses 1% of the Net Demand and Time Liabilities (NDTL) and is approximately ₹3 lakh crore.
- The daily VRR auctions, which started in January 2025, gave banks the ability to borrow funds using government securities as collateral.
- The removal of daily VRR auctions could stabilize market sentiment and reduce volatility in short-term rates.
- No market disruptions are expected due to the discontinuation of daily VRR auctions, given the surplus and the availability of other liquidity management tools under the RBI's Liquidity Adjustment Facility (LAF) framework.
Investors and financial analysts may have varying opinions on the RBI's decision to end daily Variable Rate Repo (VRR) auctions, as this move could signal a positive outlook for the banking system's stability and market conditions. The RBI's liquidity operations are being adjusted to align with the improved market scenario and the surplus liquidity in the system, which could have implications for the investing landscape in the business sector. The removal of daily VRR auctions could potentially smooth market sentiment and decrease volatility in short-term rates, making it crucial for news outlets to keep a watchful eye on these developments in the finance world.
