Source: BL
Context:
The Reserve Bank of India conducted two variable rate repo (VRR) auctions on Friday to infuse liquidity in the banking system.
RBI’s Liquidity Management Strategy
- RBI is targeting a system liquidity surplus of ₹1.5–2 lakh crore to ensure:
- Smooth monetary transmission of repo rate cuts into lending and deposit rates.
- Adequate short-term liquidity for banks.
Cash Reserve Ratio (CRR) Reduction
- CRR Cut: To be implemented in four tranches of 25 bps each on
- Sept 6, Oct 4, Nov 1, Nov 29 (2025).
- Impact: Will release about ₹2.5 lakh crore of primary liquidity into the banking system by Dec 2025.
Key Concepts for Exams
- Variable Rate Repo (VRR):
- Short-term liquidity tool under RBI’s Liquidity Adjustment Facility (LAF).
- Repo operations conducted at market-determined rates via auction (unlike fixed-rate repo at the policy repo rate).
- Liquidity Management Tools of RBI:
- Repo & Reverse Repo
- Variable Rate Repo (VRR) & Variable Rate Reverse Repo (VRRR)
- Cash Reserve Ratio (CRR)
- Open Market Operations (OMOs)
- Significance of VRR:
- Provides flexibility in liquidity injection.
- Ensures banks borrow at competitive rates.
- Helps RBI fine-tune short-term liquidity mismatches.
