Variable Rate Repo:
The Reserve Bank of India (RBI) infused over Rs 25,000 crore of liquidity in the banking system through a 3-day variable rate repo (VRR) auction.
- The RBI has infused Rs 3.50 lakh crore of liquidity into the banking system through open market purchase (OMO) of government securities since January 2026.
- Variable Rate Repo (VRR) is a market-driven monetary policy tool used by the RBI to inject short-term liquidity into the banking system.
- Unlike the standard “Fixed Repo Rate,” where the interest rate is pre-set by the RBI (currently 5.25%), the interest rate in a VRR is determined through an auction process.
- VRR is a liquidity injection tool under the Liquidity Adjustment Facility (LAF). Banks bid competitively for funds, and the cut-off rate is determined by the highest accepted bid, reflecting real-time market demand.
- The RBI allots funds starting from the highest bids until the notified amount is exhausted.
- Auctions typically range from 1 to 14 days and require banks to provide eligible government securities as collateral for the borrowed funds.
- When the RBI observes a liquidity deficit in the banking system (e.g., due to advance tax outflows or festive season cash withdrawals), it announces a VRR auction.
- It helps keep the Weighted Average Call Rate (WACR), the operating target of monetary policy, aligned with the Repo rate.
- It prevents the RBI from “guessing” the right interest rate, allowing banks to signal the actual cost of funds based on their immediate needs.
