Mumbai: The Reserve Bank of India on Thursday announced its decision to suck out ₹25,000 crore of liquidity from the banking system through the variable reverse repo rate (VRRR) auction. This move has surprised market participants as it comes at a time when the system's liquidity slipped into a deficit earlier this week.

The RBI said the 14-day auction will be held on Friday.

The deficit in the system came after two months on account of goods and services tax (GST) payments of ₹1.6-1.8 trillion and forex outflows over $25 billion in the last two months.

The system saw a deficit of ₹9,489 crore of liquidity, according to the latest available data on RBI.

VRRR is the rate at which the RBI borrows from banks for a variable period through an auction process.

Treasury heads said this is a rollover of the existing VRRRs that are being conducted by RBI. In November alone, RBI has conducted 13 VRRRs auctions of different tenures, most of which received lukewarm response.

Market participants, however, believe that this one, too, may receive lower bids.

Few other treasury heads believe that this move by the central bank to further suck out liquidity through the VRRR route is aimed at creating higher demand for rupee, which will in turn support the falling currency.

Also Read | Data dive: Should RBI let the rupee fall?

Rupee has been the second-worst performing currency in Asia due to aggressive selling by foreign investors. Donald Trump's victory in the US has opened the door for higher tariffs, a stronger dollar, and higher bond yields—all contributing to a weaker rupee.

The Indian currency hit 84.51 before closing at 84.4850 on Thursday as foreign portfolio investors sold shares worth ₹11,000 crores.

"With relatively tighter liquidity conditions and elevated call rates above Repo, rollover of VRRR may be directed towards weakening of Rupee which is hitting 84.50 level. Costlier Rupee may be helpful against strengthening dollar," said Gopal Tripathi, treasury head, Jana Small Finance Bank.