RBI Discontinues Daily Liquidity Support: Here’s Why the Central Bank Ended Daily VRR Auctions

The Reserve Bank of India (RBI) has decided to discontinue its daily liquidity support through Variable Rate Repo (VRR) auctions starting June 11, 2025. This move follows a sustained improvement in banking system liquidity, which has turned into a massive surplus since April.

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 What Is Daily VRR and Why Was It Introduced?

Variable Rate Repo (VRR) is a short-term monetary tool that allows the RBI to inject liquidity into the banking system when there’s a cash crunch. Banks and primary dealers bid at rates generally higher than the repo rate to borrow funds for one day.

Amid tightening liquidity in late 2024—caused by tax outflows, weak government spending, and foreign portfolio investor (FPI) sell-offs—the RBI began conducting daily VRR auctions from January 16, 2025 to support banks and stabilize short-term interest rates.

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 How Much Liquidity Did the RBI Inject Through Daily VRR?

According to RBI data, from January to June 2025, the central bank pumped a staggering ₹43.61 lakh crore via daily VRRs. These funds were overnight infusions, reversed the next day.

Here’s a month-wise breakdown:
• January: ₹13.48 lakh crore
• February: ₹17.75 lakh crore
• March: ₹8.91 lakh crore
• April: ₹2.13 lakh crore
• May: ₹1.07 lakh crore
• June (till 9th): ₹25,899 crore

 Why Is RBI Halting Daily VRR Now?

RBI’s decision is rooted in significant improvements in liquidity conditions. Since April 1, 2025, a series of durable liquidity measures has resulted in a surplus of over ₹3 lakh crore.

These include:
• Open Market Operations (OMOs): RBI injected ₹4.84 lakh crore via 15 bond purchase auctions.
• USD/INR Buy-Sell Swaps: Infused liquidity worth $25.2 billion.
• Bond redemptions and interest payments, along with month-end government payouts like salaries and pensions.

With these drivers, the banking system is awash with funds, rendering daily VRR unnecessary.

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 Did Daily VRR Help Banks?

Yes. Daily VRR auctions were highly effective in easing short-term liquidity stress. Market participants note that these injections helped maintain overnight call rates near or below the repo rate, ensuring smoother interbank transactions during the liquidity crunch.

️ What Caused the Liquidity Shortage Before January?

Between November and December 2024, liquidity in the banking sector turned negative due to:
• Large tax outflows
• Heavy FPI equity sell-offs
• Forex market interventions by RBI to stabilize the rupee
• Sluggish government spending

In response, the RBI initiated daily VRR operations to offset the strain.

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 What’s the Outlook for Liquidity in 2025?

Experts predict a continued liquidity surplus throughout the remainder of the year, driven by:
• RBI Surplus Transfer: ₹2.69 lakh crore transferred to the government for FY25.
• CRR Cut: A 100 basis points (bps) reduction in the Cash Reserve Ratio in June will inject ₹2.5 lakh crore between September and November.

These moves are expected to further strengthen liquidity, giving the RBI room to shift away from daily support tools.

 Key Takeaways for Investors and Markets

• RBI’s exit from daily VRR signals robust banking system liquidity.
• Markets may expect more stable interest rates in the short term.
• Policy focus is likely to shift from short-term fixes to long-term liquidity management.

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