Variable Rate Repo (VRR) Auctions:
The RBI injected ₹55,837 crore into the banking system via a 3-day VRR auction to address tightening liquidity.
- A Variable Rate Repo (VRR) is a monetary policy tool used by the RBI to inject liquidity into the banking system when cash becomes scarce. Unlike the fixed-rate repo, the interest rate in a VRR is determined through a competitive bidding
- The RBI notifies banks of its intent to lend a specific amount (e.g., ₹1 lakh crore) for a set duration (e.g., 3 days).
- Commercial banks submit bids stating the amount they want to borrow and the interest rate they are willing to pay.
- The RBI accepts bids starting from the highest rate offered down to a cut-off rate, which is the lowest rate at which funds are disbursed.
- Banks provide government securities to the RBI as collateral, which they repurchase (Repo) at the end of the term.
- The primary objective is liquidity management. By infusing cash, the RBI ensures that banks have enough funds to meet daily requirements, preventing the Call Money Rate (the rate at which banks lend to each other) from spiking far above the policy Repo rate.
Key Features of Short-Term VRR:
- It targets immediate, temporary deficits (usually 1 to 14 days) caused by seasonal factors like tax payments or festivals.
- The Variable Rate allows the market to determine the cost of funds based on actual demand.
- These are tactical tools, unlike Open Market Operations (OMO), which provide long-term durable liquidity.
- Like all repo transactions, these are backed by high-quality government bonds.
