The Reserve Bank of India (RBI) on Tuesday injected ₹48,014 crore into the banking system through a seven-day variable rate repo (VRR) auction, as it moved to ease tightening liquidity conditions driven by tax-related outflows. 

The funds were infused at a cut-off and weighted average rate of 5.26%, the central bank said. The amount absorbed was, however, significantly lower than the notified ₹1.50 lakh crore, reflecting relatively moderate demand from banks despite a sharp fall in surplus liquidity. 

The VRR auction is a tool used by the RBI to provide short-term liquidity to banks, with lenders bidding for funds at market-determined rates. 

Liquidity sees sharp drop 

Liquidity conditions have tightened considerably over the past few days, primarily due to advance tax payments. System liquidity surplus dropped to ₹75,483.63 crore as of March 16, down sharply from ₹2.08 lakh crore recorded on March 15. 

The liquidity situation is expected to come under further strain later this week as outflows related to goods and services tax (GST) payments take effect, potentially pulling down surplus levels further. 

RBI maintains liquidity support stance 

The RBI has been proactively managing liquidity to ensure stability in short-term interest rates. Since January, the central bank has infused ₹3.50 lakh crore of durable liquidity through open market operations (OMO), mainly via purchases of government securities. 

These measures have helped keep overnight money market rates well below the policy repo rate, indicating ample liquidity support despite intermittent tightening phases. 

With tax outflows impacting system liquidity in the near term, market participants expect the RBI to continue using tools such as VRR auctions and OMO purchases to maintain adequate liquidity and prevent volatility in short-term rates. 

Reports say that the central bank may step up the frequency or size of liquidity operations if the deficit deepens, especially towards the financial year-end when demand for funds typically rises. This could include a mix of short-term tools like VRR auctions and longer-term measures to ensure that credit flows to the economy remain unaffected.