Image Source: Angel One
The Reserve Bank of India (RBI) has announced that it will conduct an overnight variable rate repo (VRR) auction on September 22, 2025, for an amount of ₹1 trillion. This move is a part of RBI’s ongoing efforts to manage liquidity conditions in the banking system and ensure that overnight money market rates remain aligned with the policy repo rate. This auction reflects RBI’s proactive liquidity management amid fluctuating cash flows and banking system surplus.
Key Developments Ahead of the Auction
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The ₹1 trillion auction scheduled for September 22 is intended to inject liquidity into the system through Variable Rate Repo operations. This auction tool helps banks access funds for short terms at market-driven interest rates.
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Previously, RBI’s VRR and Variable Rate Reverse Repo (VRRR) auctions have been used strategically to either inject or absorb liquidity, with bids often exceeding the notified amounts, signaling strong demand from banks.
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The liquidity surplus in the Indian banking system has seen fluctuations recently, with RBI removing or injecting funds based on evolving economic conditions like tax outflows or government spending.
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The auction’s variable rate feature allows the RBI to calibrate liquidity precisely, balancing pressure on overnight interest rates such as the Weighted Average Call Rate (WACR), which currently trades close to the repo rate of 5.50%.
Understanding the Liquidity Context
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The Indian banking system has witnessed periods of surplus liquidity reaching several trillion rupees. RBI’s liquidity adjustment facility, which includes repo and reverse repo auctions, plays a significant role in controlling this surplus.
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The VRR auction operates under RBI’s Liquidity Adjustment Facility (LAF) and fine-tunes short-term liquidity without impacting durable liquidity.
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Recent auctions have seen the RBI accepting bids at cut-off rates around 5.47-5.51%, helping maintain the overnight call money market to operate within the LAF corridor defined by the repo rate and marginal standing facility (MSF) rate.
Implications for Markets and Banks
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The ₹1 trillion VRR auction is expected to provide banks with ease of access to liquidity for very short durations, supporting smooth market operations.
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This move could also help keep overnight funding costs stable, aligning them closely with RBI’s monetary policy stance.
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Market participants will watch the auction’s cut-off price closely as an indicator of liquidity stress or comfort in the system ahead of end-month financial activities.
In summary, RBI’s announcement to conduct the overnight VRR auction on September 22 reinforces its ongoing vigilant approach to liquidity management. By injecting ₹1 trillion through this auction, the central bank aims to stabilize short-term borrowing costs and maintain orderly functioning of the overnight money market at a time when liquidity conditions are dynamic.
Source: Business Standard; Angel One Market Updates; RBI Press Releases
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