Context:
The Reserve Bank of India (RBI) will conduct a seven-day Variable Rate Reverse Repo (VRRR) auction worth â‚ą1 trillion on Friday, June 27, aiming to absorb excess liquidity from the banking system. The move follows a sharp build-up in surplus liquidity that has pushed the Weighted Average Call Rate (WACR) below the policy repo rate of 5.50%.
Relation Between Variable Rate Repo (VRR) and Variable Rate Reverse Repo (VRRR)
The Reserve Bank of India (RBI) uses multiple tools to manage systemic liquidity. Among these are the Variable Rate Repo (VRR) to inject liquidity and the Variable Rate Reverse Repo (VRRR) to absorb surplus liquidity from the banking system.
What is Variable Rate Reverse Repo (VRRR)?
- VRRR is a liquidity absorption mechanism where banks park surplus funds with the RBI.
- Conducted via auctions, the interest rate is market-determined through competitive bidding.
- Typically, the VRRR rate is equal to or slightly higher than the standard reverse repo rate.
- VRRR is deployed when the banking system has excess liquidity, making it an effective tool to:
- Curb inflationary pressures
- Maintain monetary stability
How it Relates to Variable Rate Repo (VRR):
| Tool | Objective | Liquidity Effect |
|---|---|---|
| VRR | Inject funds into the banking system | Adds liquidity |
| VRRR | Mop up surplus funds from banks | Absorbs liquidity |
