Variable rate reverse repo auction

• The Reserve Bank of India (RBI) will conduct a four-day variable rate reverse repo auction for a notified amount of Rs 1 lakh crore.

INTRODUCTION

• The Reserve Bank of India (RBI), as the country’s central banking institution, plays a vital role in managing the monetary policy framework and maintaining financial stability. One of the tools used by the RBI to regulate liquidity in the banking system is the Reverse Repo Auction.
• In line with this objective, the RBI recently conducted a Two-Day Variable Rate Reverse Repo (VRRR) Auction for Rs 75,000 Crore.
• Despite having surplus liquidity, there was muted response from banks to the Variable reverse repo (VRRR) auction.

REPO RATE

• The rate at which the RBI issues loans to commercial banks when there is a shortage of funds is the repo rate.
• It is used by monetary authorities to control inflation.
• Current repo rate announced by monetary policy committee is 50%.

REVERSE REPO RATE

• It is the variable or fixed interest rate the RBI pays to commercial banks when they store excess cash reserves with the central bank.
• It is a monetary policy instrument which can be used to control the money supply in the country.
• Current reverse repo rate is at 35%.

VARIABLE RATE REVERSE REPO (VRRR)

• A reverse repo is a fixed or variable interest rate at which banks lend to RBI.
• It is the subdivision of reverse repo.

The VRRR auction is undertaken to reduce surplus liquidity in the system by withdrawing existing cash