Variable Rate Repo

Indian Economy glossary

Also called: VRR · Topic: Banking, Credit Creation and Monetary Policy · NCERT: Beyond NCERT

Meaning

Variable Rate Repo (VRR) is an auction in which banks bid to borrow funds from RBI at rates at or above the repo rate. RBI lends against government securities as collateral, so the injection is temporary. It is part of the Liquidity Adjustment Facility (LAF), RBI's system for managing day-to-day liquidity in the banking system. Tenors run from overnight to 14 days. The rate is set by the auction, not fixed in advance. This lets RBI add a chosen amount of funds and keep overnight rates close to the repo rate.

Example

Under the February 2020 liquidity framework, the 14-day VRR auction became RBI's main liquidity operation. When liquidity is tight, RBI announces a VRR auction, and banks bid, for example, a little above the repo rate to get funds.

Don't confuse with

  • Variable Rate Reverse Repo (VRRR): this auction absorbs liquidity. Banks bid to park surplus funds with RBI.
  • Marginal Standing Facility (MSF): this is an overnight emergency window at a fixed penal rate of repo + 25 bps. It is not an auction.

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