RBI’s ₹6 Trillion VRRR Tempers Expectations of CRR Action

The Reserve Bank of India’s decision to conduct a 15-day variable rate reverse repo auction with a notified amount of ₹6 trillion is likely to temper expectations of an imminent increase in the cash reserve ratio or the use of an incremental CRR to drain surplus liquidity.

The operation, scheduled for August 31, is the largest VRRR announced in more than four years. In April 2022, the RBI had conducted an ₹8 trillion 14-day auction.

Expectations of reserve action had risen as market economists forecast durable liquidity could climb towards ₹9 trillion–₹10 trillion with higher government spending, while overnight rates remained below the 5.25% policy repo rate despite shorter VRRR operations.

The size and tenor of the latest operation suggest the central bank may first rely on larger, market-based and reversible auctions before turning to a broad reserve measure. A CRR increase would remove liquidity more durably, while an iCRR would temporarily impound part of the increase in banks’ liabilities.

There is also a seasonal consideration.

When the RBI phased out its 2023 iCRR, it explicitly said the release was intended to return impounded funds to the banking system ahead of the festival season. The September 15 reversal similarly allows it to absorb the current surplus without committing to a lasting withdrawal as seasonal currency demand approaches.

Still, ₹6 trillion is only the notified ceiling, not assured absorption. A ₹2.5 trillion seven-day VRRR on August 24 drew bids of just ₹919.8 billion, all of which were accepted at 5.24%.

A strong response on Monday would strengthen the case for continued use of longer-tenor VRRRs. Weak demand, or a surplus that persists after festival-related currency demand sets in, could revive expectations of iCRR, CRR or open-market bond sales.