Muted Response To RBI's VRRR As Overnight Rates Rise, Reducing Arbitrage

Banks stay away as short-term rates come close to the RBI’s main rate, cutting easy profits

Interest rates in the money market can change very fast. On July 31, 2025, the Reserve Bank of India (RBI) held an auction called the Variable Rate Reverse Repo (VRRR), but banks didn’t show much interest. Even though ₹50,000 crore was available, they placed bids for only ₹13,075 crore, according to Business Standard.

This shows banks aren’t finding much extra profit from RBI’s offer anymore. VRRR is used by the RBI to take back extra money from banks for a few days, and it pays interest for this.

But now, overnight market rates are nearly the same as RBI’s main rate of 5.50%. So banks can earn just as much money in the open market, without locking their funds with the RBI. That’s why fewer banks joined the auction on July 31.

Market Reaction to the Auction

The muted response was tied to the shift in short-term rates. The Weighted Average Call Rate (WACR), which reflects borrowing costs for banks overnight, touched 5.49 percent. The Tri-Party Repo (TREPS) rate followed closely at 5.43 percent. In such conditions, VRRR participation loses its charm because banks can secure almost the same return outside the RBI window.

The auction results, as reported, show how closely market behaviour follows rate movements:
 

A look at this table shows a sharp drop in bids compared to earlier auctions. Participation was strong when overnight rates were lower. As soon as market rates began to rise, the advantage disappeared.

Liquidity and System Surplus

The RBI liquidity framework report notes that overall system liquidity still carries a surplus, standing at about ₹2.54 lakh crore. This number is not small, yet its flow has changed. Banks appear more comfortable earning returns in the open market than committing to the VRRR for a few days.

A closer view of liquidity indicators makes the trend visible:
 

This signals that even with surplus cash, banks are choosing flexibility.

Why This Response Matters?

Each RBI auction gives clues about what’s happening in the market. When banks show low interest in VRRR, it means the gap between market rates and RBI’s offer is almost gone. If banks don’t see extra returns, they won’t lock their money with the RBI.

The RBI has said that these auctions aim to keep short-term market rates close to its main policy rate. That goal now seems to be met.

Earlier in the month, banks had moved money from the Standing Deposit Facility (SDF) to VRRR. The SDF gives a lower fixed rate, so when VRRR gave a slightly better return, banks preferred it. But now that open market rates are near 5.5%, VRRR is no longer attractive.

So the low response on July 31 doesn’t mean banks lack money, it shows they are just choosing places where they get better returns without locking their funds.

Comparing Past Auctions

For context, recent history provides a clear contrast:
 

The table shows that demand for VRRR has fallen as rates closed the gap. This pattern suggests the RBI’s short-term liquidity tools are now working as intended by bringing market rates up to the policy rate.

What Lies Ahead for Banks

Banks and market players are likely to keep using call money and tri-party repo deals as long as these give the same or slightly better returns than VRRR auctions. Experts looking at the July 31 auction said that unless the RBI increases the auction rate or the liquidity in the system tightens, low participation may continue.

The RBI may not see this as a problem. VRRR is meant to be optional. Its success is not based on how much money is parked but on how closely short-term rates match the RBI’s main policy rate.

Conclusion 

The July 31 auction shows how quickly market conditions can change when short-term interest rates shift. The low response shows that banks now prefer more flexible options that give quick returns rather than locking money with the RBI for a few days.

For the RBI, this means their policy is working, overnight rates have reached the level they wanted. For banks, it’s just about putting their money where they earn the best possible return, now that easy profits from rate differences are gone.

Apply for Loans Fast and Hassle-Free

Apply Now

About the Author

LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?