MC EXPLAINER Why did RBI end daily liquidity support?

Reserve Bank of India

The Reserve Bank of India (RBI) announced on June 9 that it will discontinue the daily liquidity support to the banking system through daily variable rate repo (VRR) auctions due to the improving liquidity conditions.

The decision was taken by the RBI after systemic liquidity in the banking system turned positive and crossed the Rs 3 lakh crore mark. The discontinuation of the daily VRR will come into effect from June 11, an RBI release said.

Here are the key reasons behind the discontinuation of daily VRR auctions.

What is daily VRR and why was it started?

VRR is a liquidity injection system by the RBI, through which it infuses liquidity into the banking system when it narrows or falls into deficit mode. Usually, bids submitted by the banks or primary dealers are mostly above the repo rate.

Daily VRR is a liquidity tool introduced by the central bank on January 16, 2025, to support liquidity in the banking system, which was under pressure in December last year.

How much liquidity support does RBI provide via daily VRR?

Data compiled from the RBI’s website shows that the central bank had injected Rs 43.61 lakh crore into the banking system through the daily VRR auctions. These funds got reversed on the next day.

The central bank infused Rs 13.48 lakh crore in January, Rs 17.75 lakh crore in February, Rs 8.91 lakh crore in March, Rs 2.13 lakh crore in April, Rs 1.07 lakh crore in May, and Rs 25,899 crore so far in June – all in 2025.

Do these funds stay with banks?

No. The money infused through this instrument stays with the bank for one day and it gets reversed the next day, as per norms.

Why is RBI stopping daily VRR now?

The central bank said that on a review of the current and evolving liquidity conditions, it has decided to discontinue daily VRR.

The liquidity condition in the banking system has turned positive since April 1, thanks to a slew of measures by the RBI to infuse durable liquidity, along with daily VRR.

With all these measures, liquidity has turned into huge surplus, crossing over Rs 3 lakh crore and an expected further increase must have given RBI the confidence to discontinue daily VRR auctions, money market experts said.

How did liquidity turn into huge surplus?

The liquidity in the banking system turned positive, thanks to RBI measures such as bond purchases through open market operations (OMO), and USD/INR Buy/Sell swap auction.

The central bank injected Rs 4.84 lakh crore liquidity through 15 OMO purchase auctions and $25.2 billion via USD/INR Buy/Sell swap auctions.

Along with some inflows on account of redemption of bonds, interest payments on bonds, month-end salaries and pension, they have helped liquidity to turn positive.

Has VRR helped to ease pressure on banks?

Yes. According to market participants, the daily VRR has helped banks to ease deficit liquidity pressure and keep overnight money market rates either near repo or below it.

Why was there a liquidity deficit till December?

Liquidity in the banking system has been under stress since November 2024 due to tax outflows, heavy selling of Indian equities by foreign portfolio investors and consequent intervention by the RBI in the forex market to sell dollars, along with lower-than-anticipated government spending.

To support this, the RBI initially started daily VRR auctions in January.

What is the expected net liquidity position in the banking system till December this year?

The banking system is expected to be flush with funds till the end of this calendar year due to the dividend funds transferred by the RBI to government and the Cash Reserve Ratio (CRR) cut announced in June.

Last month, the RBI’s central board has approved the transfer of Rs 2.69 lakh crore as surplus to the government for financial year 2024-25. These funds, experts believe, will flow into the banking system in the coming few months.

Further, Rs 2.5 lakh crore will flow into the banking system from the CRR cut between September and November this year. In the June policy, the RBI reduced CRR by 100 basis points (bps) -- the biggest cut since 2020 -- to boost liquidity in the banking system.