RBI Steps in With ₹500 Billion VRR as Call Rate Hits Corridor Ceiling

The Reserve Bank of India will inject ₹500 billion into the banking system through a two-day variable rate repo after overnight funding costs spiked to the top of the policy corridor. The weighted average call rate touched 5.79% today, slightly higher than the marginal standing facility rate, following heavy tax outflows and earlier liquidity absorption through reverse repo operations.

The auction marks a tactical shift after weeks of surplus absorption. Since late June, the RBI has been conducting variable rate reverse repos to pull down excess liquidity and realign the WACR with the 5.5% policy repo rate. That strategy succeeded in pulling overnight rates up from the Standing Deposit Facility floor, but this week’s tax-driven outflows temporarily tipped conditions into deficit. 

The banking system’s liquidity surplus is currently estimated at around ₹2.4 trillion, with nearly ₹2 trillion absorbed in the RBI’s reverse repo auction conducted last week. This left banks with less cash on hand to meet payment obligations. When scheduled GST outflows over the weekend drew additional funds into government accounts, interbank liquidity tightened sharply and the weighted average call rate spiked to the marginal standing facility ceiling of 5.75%. The RBI’s two day variable rate repo injection of ₹500 billion is intended to ease this temporary strain and realign overnight rates with the 5.5% policy repo without changing the broader stance.

The central bank’s dual approach, absorbing when surplus and injecting when tight,  underscores its intent to keep the operating target firmly anchored around the policy rate. Governor Sanjay Malhotra reiterated in a recent CNBC-TV18 interview that the weighted average call rate, not TREPS or market repo, is the benchmark for monetary policy operations. Markets had begun to assume that the Standing Deposit Facility floor was becoming the de facto target, interpreting earlier drifts in call rates as stealth easing.

By allowing the rate to rise toward the ceiling and then aiming to calm it with liquidity, the RBI is signalling discipline without rigidity. The approach ensures that deviations from the policy rate are temporary and that overnight markets function smoothly within the corridor.

This fine-tuning coincides with upcoming changes to money market benchmarks that could improve policy transmission. From August 4, FBIL’s MIBOR will be calculated using three hours of call market trades rather than one, following an RBI committee’s recommendation that most volumes occur in this window. A more representative benchmark should enhance the credibility of overnight rate signals and align market expectations more closely with the policy rate.

For now, funding pressures should ease with the repo injection, but the episode serves as a reminder of how quickly conditions can swing around tax dates and large liquidity operations. The RBI’s willingness to operate on both sides of the corridor, draining or injecting as needed, marks a more active approach to keeping the weighted average call rate close to the policy anchor.

The storm in the teacup may have subsided, but the signal remains unmistakable: policy discipline is back at the centre of the corridor.