Context: To ease liquidity tightness in the banking system, the Reserve Bank of India (RBI) has decided to conduct daily variable rate repo (VRR) auctions until further notice. The first such auction will be conducted on January 16 for ₹50,000 crore.
Relevance of the Topic:Prelims: Key facts about Variable Repo Rate (VRR).
Why is there a liquidity deficit?
- RBI’s intervention in the forex market aimed at ensuring gradual depreciation of the rupee against the dollar have caused the current liquidity deficit in the economy.
- As of January 2025, the RBI’s intervention in the forex market is estimated at about ₹2 lakh crore.
What is Variable Repo Rate?
- Also called Term Repo Rates, VRR is a liquidity injection tool used by the RBI for managing short-term liquidity in the economy.
- 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.
- For injection of durable liquidity, the RBI conducts VRR auctions for a tenor beyond 14 days (but very rarely).
- Rate of Interest: Borrowing through VRR is at a rate decided by market, generally lower than the Repo Rate (though not less than Reverse Repo Rate).
- Who can participate in VRR: Standalone primary dealers along with all other eligible participants are allowed to participate in these auctions.
- What VRR will do?
- The daily liquidity support via VRR auction could neutralise the (rupee) liquidity-draining effect of RBI’s forex market intervention.
- Improved liquidity conditions could lead to softening of government securities (G-Sec) yields.
Difference between Repo and Variable Repo
| S.No. | Aspect | Repo Rate | Variable Repo Rate |
| 1. | Definition | Fixed rate at which RBI lends money to commercial banks | Market-determined rate in auctions conducted by RBI |
| 2. | Usage | Used in regular monetary policy operations to control liquidity | Used in fine-tuning short-term liquidity |
| 3. | Determination | Set directly by the RBI | Determined through market bidding in RBI auctions |
| 4. | Purpose | To influence borrowing costs for banks and control inflation or liquidity | Manage short-term liquidity needs |
| 5. | Impact on banks | Provides liquidity to banks at a predictable cost. | Provides liquidity at market-driven rates. |