RBI Conducts VRR Auctions to Infuse Liquidity

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

1. 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).
2. 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)
3. Significance of VRR:
   • Provides flexibility in liquidity injection.
   • Ensures banks borrow at competitive rates.
   • Helps RBI fine-tune short-term liquidity mismatches.