Reserve Bank Of India’s Variable Repo Rate auction sees huge response by  banks suggesting an increased demand for liquidity in banking sector.

• Banks submitted bids worth ₹1,13,915 crore, significantly exceeding the RBI’s offer of ₹50,000 crore.
• Liquidity Deficit: It is estimated that liquidity in the banking system is in deficit to the tune of around ₹1.54-lakh crore.

Variable Rate Repo Auction

Also called Term Repo Rates, It is a liquidity injection tool of the RBI for liquidity management in the economy.

• Current situation: The RBI has been conducting VRRs to inject liquidity on a temporary basis into the banking system since december 2023
  • In mid-January, the tenor of the VRR was increased  to 14 days to match the CRR cycle for  steady State injection. Further to this, it has been conducting short-dated VRRs (1-7day) periodically to ‘fine tune’ market liquidity.
• VRR Auctions: They are conducted by the RBI, when the weighted average call money rate trends above the repo rate in the interbank money market, serving as a signal to the RBI of System Liquidity Deficit. 
• Tenure:  It is a short term liquidity injection against collaterals with a tenor of Overnight to 13 days usually.
  • But, for injection of durable liquidity, the RBI conducts VRR auctions for a tenor beyond 14 days very rarely.
• Rate of Interest: It generally is  borrowed at a rate decided by market generally lower than Repo Rate (though not less than Reverse Repo Rate).

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Other strategies to Infuse liquidity in Economy

The Target is to let interbank liquidity enter into a surplus by July.

• RBI Transfers: RBI has transferred to the government  ₹2.1 trillion as a dividend coupled with the cancellation of weekly treasury bill auctions of ₹60,000 crore.
• RBI’s Foreign Exchange intervention: The FX strategy of RBI is the main driver of interbank liquidity. 
  • FPI accounts have resumed buying India Government Bonds (IGBs), though in small sizes for now.
• Inflows: Inflows from GOI redemptions, interest payments and lower T-bill issuance will also start.

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