RBI's Strategic Liquidity Injection Aims to Stabilize Money Markets

In a decisive effort to tackle liquidity challenges in the Indian banking system, the Reserve Bank of India (RBI) has carried out a series of Variable Rate Repo (VRR) auctions, injecting a significant ₹76,000 crore into the financial system. The goal of this initiative is to ease liquidity pressures and stabilize short-term interest rates, particularly the call money rates, which had been exceeding the RBI’s repo rate of 6.5%.

Key Objective
The RBI’s use of VRR auctions is aimed at boosting liquidity in the banking system, thereby lowering the weighted average call rate (WACR) and bringing overnight borrowing costs in line with the repo rate. This intervention is expected to ease liquidity conditions and prevent call money rates from significantly surpassing the current repo rate.

Important Details

• Auction Information: On January 20, 2025, the RBI conducted a VRR auction, accepting bids totaling ₹75,772 crore at a cut-off rate of 6.51%. The liquidity injected is set to be reversed on January 21, 2025.
• Liquidity Deficit: As of January 19, 2025, the banking system faced a liquidity deficit of ₹1.93 lakh crore, with an average deficit of ₹1.61 lakh crore in January.
• Market Impact: On January 20, 2025, the WACR closed at 6.60%, reflecting that overnight borrowing costs were slightly above the repo rate due to the liquidity shortfall.
   

Expert Analysis
While daily VRR auctions are expected to help reduce volatility in overnight rates, some experts believe that these measures may not fully resolve the higher liquidity deficit. Alok Singh, Group Head of Treasury at CSB Bank, pointed out that while daily VRR auctions can reduce short-term rate fluctuations, they may not provide a lasting solution to the liquidity gap.

Historical Context
This move follows a series of similar actions by the RBI to manage liquidity, including a ₹1.16 lakh crore injection via three VRR auctions in March 2024 amid tight liquidity conditions.
 

Variable Rate Repo (VRR) – Key Points

• Definition: A liquidity adjustment mechanism used by the RBI to inject short-term funds into the banking system.
• Interest Rate: Set through an auction, as opposed to a fixed-rate repo.
• Purpose: To manage liquidity deficits and stabilize short-term interest rates, such as the call money rate.
• Tenure: Typically short-term, often overnight or up to 14 days.
• Mechanism: Banks bid for funds at varying interest rates, with the RBI accepting bids starting from the lowest rates.
• Frequency: Conducted as needed based on liquidity conditions in the market.
• Significance: Ensures that market rates align with the RBI’s policy repo rate.