Explanation – The primary purpose of a Variable Rate Repo (VRR) auction conducted by the Reserve Bank of India (RBI) is to manage liquidity in the banking system. This involves injecting short-term liquidity into the system when there is a deficit or absorbing excess liquidity when there is a surplus. By conducting VRR auctions, the RBI aims to maintain financial stability and ensure that money market interest rates evolve systematically. This helps in managing the overall liquidity conditions in the economy and supports the smooth functioning of the banking system.

Source: The Hindu