The Reserve Bank of India (RBI) announced it will conduct a 14-day variable rate reverse repo (VRRR) auction for Rs 1.25 lakh crore on April 5th, 2024. This move aims to manage surplus liquidity within the banking system.
VRRR stands for Variable Rate Reverse Repo. It's a monetary tool used by the RBI to absorb excess liquidity from banks. Banks can invest their surplus funds with the RBI for a short period through VRRR auctions at a floating interest rate.
As of April 3rd, the banking system has an estimated surplus of Rs 1.58 lakh crore. This surplus liquidity can push overnight call money rates below the repo rate, the RBI's benchmark interest rate. VRRR auctions help the RBI control liquidity and align short-term rates with the repo rate.
The VRRR auction will be conducted on April 5th between 1:30 PM and 2:00 PM. Banks will bid for the auction offering surplus funds at a specific interest rate. The RBI
By absorbing excess liquidity, the VRRR auction can help the RBI: – Maintain stability in short-term interest rates. – Manage inflation by tightening money supply. – Signal future monetary policy actions.
Moneycontrol reported that the RBI might conduct additional VRRR auctions in the coming days. This suggests the central bank intends to manage the significant surplus liquidity effectively.
A major contributor to the current surplus liquidity is government spending. This spending injects money into the banking system, leading to a temporary surplus.
The RBI's VRRR auction on April 5th is a crucial step to manage surplus liquidity in the banking system. This action helps maintain financial stability and achieve the RBI's monetary policy objectives.