The Reserve Bank of India (RBI) conducted a three-day variable rate repo (VRR) auction, receiving bids worth ₹7,091 crore, a stark contrast to the ₹50,000 crore it had notified. This muted demand is largely due to a surplus liquidity in the banking system, which was reported at ₹1.94 trillion on Monday. Following the auction, the weighted average overnight call rate decreased to 5.25%, down from 5.31%. Market analysts indicate that the elevated call rates are a reflection of growing expectations for a potential interest rate hike. Additionally, three-month and six-month overnight indexed swap (OIS) rates have also increased, with the one-month OIS rate settling at 5.40%, up from 5.37% previously. Dealers suggest that the VRR auction's lack of demand stems from the ample liquidity available, making the call market more attractive due to its less stringent collateral requirements. The RBI utilizes VRR auctions to manage short-term liquidity, ensuring that the weighted average call rate aligns closely with its policy repo rate.