The Reserve Bank of India (RBI) has initiated consultations with major treasury participants to explore narrowing the gap between the overnight call money rate (currently around 5.30%) and its policy repo rate at 5.50%. The persistent divergence since April has raised concerns about the effectiveness of monetary transmission, prompting the central bank to potentially introduce variable rate reverse repo auctions (VRRR) to withdraw surplus liquidity when necessary. Analysts interpret this move as a strategic step to ensure the repo rate more accurately guides short-term borrowing costs.
As part of its recent monetary policy package, the RBI also reduced the Cash Reserve Ratio (CRR) by 100 bps and ceased daily VRRR operations. While the repo rate was cut by 50 bps on June 6, shifting stance from accommodative to neutral, economists are urging the RBI to execute liquidity adjustments carefully to avoid volatility in money markets .
