Q. Consider the following statements:
1.Variable Rate Reverse Repo (VRRR) is the rate at which banks lend money to each other.
2.VRRR helps in absorbing excess liquidity from the banking system.
Which of the statement(s) given above is/are correct?
Answer: B
Notes:
Explanation –
Statement 1 is incorrect. Variable Rate Reverse Repo (VRRR) is not the rate at which banks lend money to each other. Instead, it is the rate at which the Reserve Bank of India (RBI) borrows money from banks for a variable period through an auction process.
Statement 2 is correct. The Variable Rate Reverse Repo (VRRR) is a monetary policy tool used by the Reserve Bank of India (RBI) to manage liquidity in the banking system. Unlike the fixed reverse repo rate, which is predetermined by the RBI, the VRRR rate is determined through an auction process, allowing market forces to influence the rate. This mechanism helps the RBI absorb excess liquidity from the banking system more effectively.
Source: The Hindu
