RBI Introduces Daily VRR Auctions

January 17, 2025

In move to manage liquidity, the Reserve Bank of India (RBI) has announced daily variable rate repo (VRR) auctions. This decision comes amid a liquidity deficit exceeding ₹2 trillion in the banking system. The auctions aim to alleviate the tight liquidity conditions, particularly with upcoming goods and services tax (GST) outflows.

Daily VRR Auctions

The RBI will conduct VRR auctions every working day in Mumbai. The initial amount for these auctions is set at approximately ₹50,000 crore. Reversals will occur the next working day, except for Fridays, when it will be on the following Monday.

Current Liquidity Situation

The banking system’s liquidity deficit has been recorded at ₹2.09 trillion recently. This situation is expected to worsen with GST outflows anticipated later in the month.

Impact on Banks

Banks have shown reluctance in previous VRR auctions, viewing them as temporary measures. They bid only ₹3,980 crore against a notified amount of ₹75,000 crore, indicating cautious participation.

What is Variable Repo Rate?

The variable repo rate is a lending rate set by the RBI that adjusts based on economic conditions.
It directly influences the interest rates banks charge on loans.
A higher repo rate increases borrowing costs, while a lower rate reduces them.

Benefits of Variable Repo Rate

The variable repo rate provides transparency for borrowers, aligning loan costs with market conditions.
It helps control inflation and promotes economic stability, allowing for potential savings when rates decrease.
Home loan borrowers linked to the variable repo rate will see fluctuations in their EMIs based on rate changes. A drop in the repo rate leads to lower payments, while an increase raises costs, affecting financial planning.

RBI’s Future Actions

The RBI may consider further measures, such as a cash reserve ratio cut, to ensure durable liquidity. The focus is currently on liquidity management rather than rate cuts.

Participating Entities

Eligible participants for the VRR auctions include standalone primary dealers. Their involvement is crucial for the effectiveness of the liquidity management strategy.

Monitoring Economic Indicators

The RBI will assess various economic indicators, including the Consumer Price Index, to inform its decisions on repo rate adjustments. Global economic trends will also play a role in these considerations.

Upcoming Challenges

The banking system is expected to face tight liquidity conditions until the end of March. The RBI’s ongoing measures aim to provide assurance to market participants during this challenging period.

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