VRRR Auction to Absorb Excess Liquidity

• 08 Jul 2025

Source: BL 

Why in News? 

The Reserve Bank of India (RBI) is set to conduct a 7-day Variable Rate Reverse Repo (VRRR) auction worth Rs 1 lakh crore to absorb surplus liquidity from the banking system. 

What are Key Facts Regarding VRRR Auction and Liquidity? 

• About VRRR: VRRR is a monetary policy tool used by the RBI to absorb excess liquidity through auctions, where banks bid at variable interest rates for placing short-term deposits with the RBI. 
  • In contrast, the Reverse Repo Rate is a fixed rate set by the RBI at which banks park excess funds without bidding, making VRRR more flexible and market-driven. 
• Reason for VRRR Auction: RBI aims to bring the overnight rates on the Tri Party Repo Dealing System (TREPS) closer to the lower bound of the Liquidity Adjustment Facility (LAF) corridor, currently between 5.25% and 5.75%. 
  • TREPS is an electronic trading platform in India that facilitates collateralized short-term borrowing and lending between banks, mutual funds, NBFCs, and other financial institutions.  
    • It operates under the oversight of RBI and is managed by the Clearing Corporation of India (CCIL). 
    • Tri-Party Structure: Involves three parties i..e, the borrower, the lender, and a third-party agent (CCIL). 
  • LAF corridor is a monetary policy tool used by RBI to regulate short-term liquidity and stabilize interest rate fluctuations in the banking system. 
    • It comprises two main rates: the Repo Rate (upper bound)—the rate at which banks borrow from the RBI, and the Reverse Repo Rate (lower bound)—the rate at which banks deposit excess funds with the RBI. 
    • Repo/Reverse Repo uses RBI's fixed interest rate for overnight liquidity, while VRR/VRRR operates through competitive bank bidding in auctions for dynamic liquidity management. 
• About Liquidity: Liquidity refers to the ease of accessing money or cash-equivalents for transactions, spending, or investment, indicating the availability of funds in the financial system. 
  • It is influenced by monetary policy, interest rates, repo/reverse repo operations, and government spending. 
• Reasons for Liquidity Surplus: Liquidity injections through open market operations (such as G-sec purchases), term Variable Rate Repo (VRR) auctions, and dollar/rupee buy-sell swaps have collectively boosted liquidity in the economy. 

Note:

• Variable Rate Repo (VRR): A VRR is a type of repo (repurchase agreement) transaction where the interest rate is determined through an auction process rather than being fixed in advance (Repo Rate is a fixed rate set by the MPC).  
  • It allows central banks (e.g., RBI) to inject or absorb liquidity from the banking system while letting market forces determine the cost of funds. 
• Repo Rate: It is the rate at which commercial banks borrow from the central bank to meet short-term liquidity needs. 
  • Banks pledge securities as collateral and agree to repurchase them later at a higher price (including interest). 
• Reverse Repo Rate: It is the rate at which the RBI borrows from commercial banks, offering government securities as collateral. 
  • It helps the RBI absorb excess liquidity and control inflation by encouraging banks to park surplus funds.

UPSC Civil Services Examination, Previous Year Questions (PYQs) 

Q. If the RBI decides to adopt an expansionist monetary policy, which of the following would it not do? (2020)

1. Cut and optimize the Statutory Liquidity Ratio 
2. Increase the Marginal Standing Facility Rate 
3. Cut the Bank Rate and Repo Rate 

Select the correct answer using the code given below: 

(a) 1 and 2 only 

(b) 2 only 

(c) 1 and 3 only 

(d) 1, 2 and 3 

Ans: (b) 

Q. Which of the following statements is/are correct regarding the Monetary Policy Committee (MPC)? (2017) 

1. It decides the RBI’s benchmark interest rates. 
2. It is a 12-member body including the Governor of RBI and is reconstituted every year. 
3. It functions under the chairmanship of the Union Finance Minister. 

Select the correct answer using the code given below: 

(a) 1 only 

(b) 1 and 2 only 

(c) 3 only 

(d) 2 and 3 only 

Ans: (a)