The Reserve Bank of India (RBI) held a Variable Rate Reverse Repo (VRRR) auction to absorb extra money from the banking system. The auction was for ₹2 lakh crore. RBI asked banks to park their surplus funds for 7 days, and banks offered a total of ₹2,00,027 crore. RBI accepted this amount and agreed to pay them 5.49% interest for holding the money for that period. Even though recent auctions saw low interest, this time banks showed strong interest and offered more than what RBI asked for.
The RBI had earlier conducted a 7-day VRRR auction for ₹2.5 trillion but got only ₹1.5 trillion in bids—indicating less interest at that time. A 3-day VRRR auction held more recently saw even less response, with ₹57,450 crore received against ₹1 trillion offered.
The Indian banking system has been facing high surplus liquidity — meaning banks have had more funds than they need. At the start of July, this surplus was over ₹4 lakh crore. To manage this excess liquidity, the Reserve Bank of India (RBI) began conducting Variable Rate Reverse Repo (VRRR) auctions.
Excess liquidity can lead to inflation if it finds its way into the economy through increased lending or spending. So, RBI is sucking out this surplus temporarily through VRRR auctions and managing the interest rates by controlling liquidity in the system.
This control inflation and keep short-term interest rates stable by managing the amount of money flowing in the system. There’s still plenty of money in the system, even though the government took out funds through GST collections.
Also Read: RBI’s new measures to improve liquidity in the banking system