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News: The Reserve Bank of India has decided to conduct a 30-day variable rate reverse repo (VRRR) auction on September 7 to suck out ₹7 lakh crore surplus liquidity from the banking system.
About Variable Rate Reverse Repo (VRRR)
- Variable Rate Reverse Repo (VRRR) is the rate at which the Reserve Bank of India (RBI) borrows money from banks for a variable period through an auction process.
- RBI announces it as part of its liquidity management framework.
- It usually conducts variable rate repo auctions to inject liquidity in the banking system when it turns into deficit mode.
- How it works:
- The RBI announces a VRRR auction, specifying the total amount and tenor.
- Banks submit competitive bids, stating the amount and interest rate at which they are willing to lend funds to the RBI.
- The RBI determines the cut-off rate based on the bids received and accepts offers at or above this rate.
- Banks earn interest at the market-determined rate for the duration of the VRRR.
- Difference between fixed reverse repo rate and VRRR: 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.
- About Repo Rate and Reverse Repo Rate: The interest rate that the RBI charges when commercial banks borrow money from it is called the repo rate.
- The interest rate the central bank pays commercial banks when they park their excess cash is called the reverse repo rate.
- Since RBI is also a bank and has to earn more than it pays, the repo rate is higher than the reverse repo rate.
- The current repo rate is 5.25%, and the reverse repo rate stands at 3.35%.
