Variable Rate Repo for Liquidity Management | 23 Mar 2026

Source: BL

Why in News? 

The Reserve Bank of India (RBI) infused over Rs 25,000 crore of liquidity in the banking system through a 3-day variable rate repo (VRR) auction. 

• Prior to this, the RBI has infused Rs 3.50 lakh crore of liquidity into the banking system through open market purchase (OMO) of government securities since January 2026.

What is Variable Rate Repo? 

• About: Variable Rate Repo (VRR) is a market-driven monetary policy tool used by the RBI to inject short-term liquidity into the banking system.  
  • Unlike the standard "Fixed Repo Rate," where the interest rate is pre-set by the RBI (currently 5.25%), the interest rate in a VRR is determined through an auction process. 
• Auction Mechanism: VRR is a liquidity injection tool under the Liquidity Adjustment Facility (LAF). Banks bid competitively for funds, and the cut-off rate is determined by the highest accepted bid, reflecting real-time market demand. 
  • The RBI allots funds starting from the highest bids until the notified amount is exhausted. 
• Tenor and Collateral: Auctions typically range from 1 to 14 days and require banks to provide eligible government securities as collateral for the borrowed funds. 
• Significance of VRR: When the RBI observes a liquidity deficit in the banking system (e.g., due to advance tax outflows or festive season cash withdrawals), it announces a VRR auction. It helps in: 
  • Liquidity Management: It helps keep the Weighted Average Call Rate (WACR), the operating target of monetary policy, aligned with the Repo rate. 
  • Market Discovery: It prevents the RBI from "guessing" the right interest rate, allowing banks to signal the actual cost of funds based on their immediate needs. 
• Difference Between the VRR vs. Fixed Repo Rate: 

What is a Liquidity Adjustment Facility? 

• About: LAF is a core monetary policy framework used by RBI to manage day-to-day liquidity mismatches in the banking system.  
  • Introduced in 2000 following the recommendations of the Narasimham Committee (1998), it allows banks to borrow money through repurchase agreements (repos) or park excess funds with the RBI. 
• Core Components of LAF: The LAF primarily operates through two types of transactions: 
  • Repo (Repurchase) Rate: The interest rate at which the RBI lends short-term money to commercial banks against the collateral of Government Securities (G-Secs).  
    • This is the Policy Rate and acts as a tool to inject liquidity into the economy. 
  • Reverse Repo Rate: The interest rate at which the RBI borrows money from banks. This is a tool to absorb excess liquidity from the market. 
    • Since April 2022, the Standing Deposit Facility (SDF) has effectively replaced the Fixed Rate Reverse Repo as the primary tool for absorbing liquidity at the floor of the LAF corridor. 
• LAF Corridor: The RBI maintains a "corridor" to keep short-term interest rates stable. This corridor ensures that the Weighted Average Call Rate (WACR), the rate at which banks lend to each other overnight—remains close to the policy repo rate. 
  • Ceiling (Upper Bound): Marginal Standing Facility (MSF). This is a "penal rate" (usually 25 bps above repo) at which banks can borrow emergency funds by dipping into their Statutory Liquidity Ratio (SLR) quota. 
  • Center: The Policy Repo Rate. 
  • Floor (Lower Bound): Standing Deposit Facility (SDF). This allows banks to park surplus funds with the RBI without the need for collateral (usually 25 bps below repo).