RBI announces ₹1 lakh crore VRR auction as advance tax outflows drain banking liquidity

The Reserve Bank of India (RBI) on Thursday announced a ₹1 lakh crore three-day variable rate repo (VRR) auction after advance tax payments tightened liquidity conditions in the banking system, pushing surplus liquidity to its lowest level in nearly three months.

According to an RBI notification, the auction will be conducted on June 19 between 9:30 am and 10:00 am, with funds set to mature on June 22.

The move comes after banking system liquidity surplus narrowed to ₹4,772.21 crore on June 17 from ₹23,881.21 crore a day earlier, according to RBI data. The latest surplus level is the lowest since March 22, when the banking system was in a liquidity deficit of ₹65,395.64 crore.

"On a review of current and evolving liquidity conditions, it has been decided to conduct a Variable Rate Repo (VRR) auction on Friday, June 19," the central bank said in a statement.

Advance tax payments tighten liquidity

Market participants attributed the sharp decline in liquidity primarily to advance tax outflows, which typically result in funds moving from the banking system to government accounts maintained with the RBI.

The tightening liquidity conditions have also pushed the weighted average call money rate above the RBI's repo rate of 5.25%, indicating increased pressure in the overnight funding market.

The latest liquidity squeeze comes despite a series of RBI interventions aimed at ensuring adequate liquidity in the financial system.

RBI steps up liquidity support

Over the past few days, the central bank has infused around ₹1.89 lakh crore through variable rate repo auctions of different tenures.

Of this, ₹89,440 crore was injected through a seven-day VRR auction on June 16, while ₹28,220 crore was infused through an overnight VRR auction on June 15. On June 18, the RBI conducted two additional VRR auctions, injecting ₹72,300 crore into the banking system.

The newly announced ₹1 lakh crore auction is expected to provide further temporary liquidity support and help stabilise short-term money market rates.

Focus on maintaining policy transmission

The RBI's latest action stresses its effort to prevent temporary tax-related liquidity tightness from disrupting broader monetary conditions.

The central bank had earlier reduced the repo rate by 50 basis points and announced a cut in the cash reserve ratio (CRR) as part of its efforts to support economic growth and improve liquidity conditions.

Market participants expect the liquidity pressure from advance tax payments to be temporary, with conditions likely to ease once government spending flows back into the banking system.