RBI’s ₹1 Lakh Cr VRRR Auction Sparks Uncertainty on Rate Cut Outlook

RBI slashes repo rates by 50 bps on June 6, 2025, is urging the banks to cut their interest rates fast, however is eyeing at absorbing excess liquidity from the market

Earlier in June 2025, the Reserve Bank of India (RBI) reduced the repo rate by 50 basis points (0.50%), making loans cheaper and encouraging spending and investment. This move was meant to push more money into the economy and support growth.

But now, the RBI is making a surprising move, it wants to take some of that extra money out of the banking system, at least for a short time. To do this, it has announced a ₹1 lakh crore VRRR auction.

RBI’s Last VRRR Auction – A Poor Response

RBI last conducted a Variable Rate Reverse Repo (VRRR) auction on November 29, 2024.

• It had planned to remove ₹25,000 crore from the banking system.
  
  
• But it got a very weak response—banks offered only ₹2,476 crore.
  
  
• This means banks didn’t want to give their extra money to the RBI, probably because there wasn’t much extra money available at the time.
  
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So, the auction failed to meet its target, which made RBI cautious about trying again—until now.

What is VRRR and Why Does RBI Use It?

What is VRRR?

VRRR stands for Variable Rate Reverse Repo. It’s a tool used by the RBI to manage liquidity, or in simpler terms, to control how much money is floating around in the banking system.

• Under VRRR, RBI borrows money from banks for a short time, and pays them interest in return.
  
  
• This money is temporarily removed from circulation, which helps RBI control inflation and keep lending in check.
  
  

Why does RBI do this?

If there’s too much money in the system, banks may start giving out loans more freely—even to risky borrowers. This can lead to problems like high inflation or bad loans.

So, VRRR helps soak up extra money, reduce reckless lending, and maintain economic balance.

How long does VRRR last?

Usually, VRRR is conducted for 7 days or 14 days. RBI decides the duration based on the current economic needs.

Also Read - The Role of Government Policies in Shaping Financial Markets

What Are the Guidelines for the June 28, 2025 VRRR Auction?

RBI has issued detailed information for the upcoming VRRR auction. 

This auction is different from the regular Standing Deposit Facility (SDF), where banks currently park extra money at a lower rate of 5.25%. With VRRR, RBI will offer a slightly higher return (5.50%), which will attract more banks to participate.

Conclusion

Right now, banks are sitting on about ₹2.5 lakh crore in extra cash. This money is being parked with the RBI at the SDF rate of 5.25%.

With the VRRR auction, RBI is trying to absorb ₹1 lakh crore, which is nearly half of this surplus. It will offer a slightly higher rate of return (closer to 5.50%), making it more attractive for banks to lock in their funds.

But this move also raises questions:

• Is RBI trying to slow down credit growth?
  
  
• Could this signal a pause or end to future rate cuts?
  
  

By increasing short-term borrowing costs, RBI may be trying to strike a balance—boost the economy when needed, but also pull back when there’s too much liquidity.
 

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