The Reserve Bank of India (RBI) has recently called for an auction on variable rate reverse repo (VRRRs).

What Is Variable Rate Reverse Repo VRRR?

• The central bank uses various ways to increase or decrease liquidity in the banking system.
• Repo rate is the rate at which the central bank gives loans to commercial banks against government securities. Reverse repo rate is the interest that RBI pays to banks for the funds. VRRR is a sub-type of reverse repo
• Since January 2021, RBI had been absorbing money from the banking system via VRRR auctions.
• The VRRR is usually undertaken to withdraw excess liquidity from the system.
• It aims to suck out surplus liquidity from the banking system. This helps RBI to maintain its monetary policy stance to remain focused on withdrawal of accommodation.

Working

• VRRR is kept higher than the reverse repo rate but lower than the repo rate to attract funds from banks
• To enjoy the higher rates, banks would attract deposits and to do that, they would offer higher interest rates on deposits.
• This way, money will go from the depositors to the banks and from the banks to the central bank, thus leading to less liquidity
• The auction route is used so that the banks that are ready to accept the lowest interest rates for deposits with RBI are selected, i.e., at the minimum interest rate above the reverse repo rate.

Guidelines for the auction

• The auction will be conducted on CBS (e-Kuber) platform.
• The minimum bid amount for the auction would be Rupees one crore and multiples thereof. The allotment would be in multiples of Rupees one crore.
• Banks would be required to place their bids in percentage terms up to two decimal places. Banks can place multiple bids.
• Successful bids will get accepted at their respective bid rates.
• Bids at or above the repo rate will be rejected.
• Once the bidding time is over, all the bids would be arranged in ascending order of the rates quoted and the cut-off rate would be arrived at the rate corresponding to the notified amount of the auction.
• Successful bidders would be those who have placed their bids at or below the cut-off rate. All bids higher than the cut-off rate would be rejected.
• There will be provision of pro-rata allotment should there be more than one successful bid at the cut-off rate.

RBI will, however, reserve the right to

(i) absorb marginally higher amount than the notified amount due to rounding effects and

ii) absorb less than the notified amount without assigning any reasons therefor.

• The reversal of the above auction would take place at the ‘start of day on the date of reversal.
• The eligible collateral and the applicable haircuts will remain the same as for LAF.