Variable Rate Reverse Repo (VRRR): RBI’s Tool to Absorb Surplus Liquidity

Subject: GS 03: Economy

Context: The Reserve Bank of India (RBI) absorbed ₹71,971 crore from the banking system through an overnight Variable Rate Reverse Repo (VRRR) auction.

• The notified auction size was ₹75,000 crore, with bids accepted at a weighted average rate of 5.24%.

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About Variable Rate Reverse Repo (VRRR)

• VRRR is a monetary policy tool used by the Reserve Bank of India (RBI) to absorb excess liquidity from the banking system. 
  • According to RBI data, surplus liquidity in the banking system is currently estimated at around 4.92 lakh crore rupees. 
• Mechanism: Banks lend/park funds with the RBI for a specified period under the VRRR operation.
• Rate Determination: The interest rate is determined through competitive bidding among participating banks rather than being fixed by the RBI.
• Purpose: It helps the RBI manage short-term interest rates and regulate liquidity conditions in the money market.

Why Was There Surplus Liquidity In The Banking System Currently?

• FCNR Deposit Mobilisation: Heavy mobilisation of Foreign Currency Non-Resident (FCNR) deposits increased liquidity in the banking system.
• RBI Currency Swaps: Currency swaps with the RBI subsequently injected additional rupee liquidity into the banking system.
• Government Spending: Month-end government expenditure on salaries and pensions released additional funds into the banking system.

Other RBI Liquidity Operations

• Open Market Operations (OMO): The RBI buys or sells government securities in the open market to inject or absorb liquidity from the banking system.
• OMO Sale: When the RBI sells government securities, funds move from banks to the RBI, thereby absorbing liquidity.
• OMO Purchase: When the RBI purchases government securities, funds move from the RBI to banks, thereby injecting liquidity.

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Comparison: Repo Rate, Reverse Repo Rate, Variable Rate Repo & Variable Rate Reverse Repo

News Source: AIR

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