To address the dynamic liquidity conditions, the Reserve Bank of India (RBI) is set to conduct an overnight Variable Rate Reverse Repo auction (VRRR) on February 6, 2024 under the Liquidity Adjustment Facility (LAF).
The move comes in response to a comprehensive review of the current liquidity landscape, which highlighted the RBI’s commitment to closely manage liquidity in the financial system. The auction, scheduled for Tuesday, February 6, 2024, will feature a Notified Amount of ₹50,000 crores with a 1 day period.
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What is Variable Rate Reverse Repo Auction (VRRR)?
The Variable Rate Reverse Repo Auction (VRRR) is a monetary policy tool used by the RBI to absorb excess liquidity in the market. In simpler terms, it is a mechanism where financial institutions deposit surplus funds with the central bank in exchange for government securities. The variable rate indicates that the interest rate on these transactions is not fixed but varies according to market dynamics.
Key Details of the Variable Rate Reverse Repo (VRRR) Auction
- Notified Amount: ₹50,000 crores
- Period: 1 day
- Window Timing: 12:30 PM to 1:00 PM on February 6, 2024
- Date of Reversal: February 7, 2024 (Wednesday)
This strategic decision is in line with the RBI’s ongoing efforts to improve its liquidity management toolkit and address changing market conditions effectively.
Download: Variable Rate Reverse Repo (VRRR) auction under LAF.pdf
Operational Guidelines for Variable Rate Reverse Repo Auction (VRRR):
The operational guidelines for the VRRR auction remain consistent with the Reserve Bank’s existing framework, as detailed in the Press Release 2019-2020/1947 dated February 13, 2020, and are given below:
Platform and Minimum Bid:
- The auction will be conducted on the CBS (e-Kuber) platform.
- The minimum bid amount is Rs. 1 crore, with multiples thereof.
Bid Placement:
- Banks must place bids in percentage terms with up to two decimal points.
- Multiple bids from banks are allowed.
Acceptance Criteria:
- Successful bids will be accepted at their respective bid rates.
- Bids at or above the repo rate will be rejected.
Cut-Off Rate Determination:
- After bidding is completed, bids will be arranged in ascending order.
- The cut-off rate will be the rate that corresponds to the notified amount, and successful bidders are those who pay at or below this rate.
Pro-Rata Allotment:
- Pro-rata allotment is possible if there are multiple successful bids at the cut-off rate.
RBI’s Discretion:
- RBI reserves the right to absorb slightly higher or lower amounts than notified amount, based on rounding effects, without providing specific reasons.
Reversal and Collateral:
- Reversal of the auction occurs at the ‘start of day’ on the reversal date.
- Eligible collateral and applicable haircuts remain consistent with LAF.
Terms and Conditions:
- All terms applicable to LAF operations are extended to the auction, subject to periodic review.
Why VRRR Auction Matters:
The decision to conduct the VRRR auction shows the RBI’s commitment to maintaining a balanced liquidity position in the financial system. By absorbing surplus liquidity, the central bank aims to prevent inflationary pressures and maintain overall economic stability.
As the global economic landscape continues to grows, central banks worldwide are adapting their strategies to ensure the efficient functioning of financial markets. The RBI’s announcement of the VRRR Auction is a proactive step towards aligning its monetary policy with the changing dynamics of the financial ecosystem.
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Conclusion
This Variable Rate Reverse Repo (VRRR) Auction highlights its dedication to managing the complexities of liquidity management. By using such targeted tools, the central bank aims to foster a conducive economic environment and boost confidence in the financial markets. As market participants engage in this auction, the overall impact on liquidity and interest rates will be closely monitored, which highlights the central bank’s commitment to adaptability and responsiveness in maintaining financial stability.
Frequently Asked Questions (FAQ)
In simpler terms, it is a mechanism where financial institutions deposit surplus funds with the central bank in exchange for government securities.
The notified amount is ₹50,000 crores.
VRRR is the rate at which the Reserve Bank of India (RBI) borrows money from banks for a variable length of time, typically 14 to 56 days. It is one of the RBI’s tools for managing liquidity in the banking system and influencing short-term interest rates.