Variable Rate Reverse Repo

Indian Economy glossary

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

Meaning

A Variable Rate Reverse Repo (VRRR) is an auction run by the RBI to take in (absorb) extra money from banks. Banks that have more funds than they need bid to park them with the RBI for a fixed period. The rate is not fixed in advance. It comes out of the bidding. VRRR is part of the Liquidity Adjustment Facility (LAF), the RBI's system for managing day-to-day liquidity, meaning the ready cash available in the banking system. Tenors run from overnight to 14 days. The Feb 2020 framework made the 14-day VRR/VRRR the main operation.

Example

Suppose banks hold large surplus funds after heavy government spending. Overnight call rates then slip towards the floor of the corridor. The RBI runs a 14-day VRRR auction, and banks park their surplus with it at the rates they bid. This pulls surplus money out of the system and pushes the Weighted Average Call Rate (WACR) back up towards the repo rate.

Don't confuse with

  • Standing Deposit Facility (SDF): a window that is always open, at a fixed rate of repo − 25 bps. VRRR is an auction held only when the RBI chooses, and its rate is set by bidding.
  • Variable Rate Repo (VRR): the opposite operation. In a VRR, banks bid to borrow from the RBI, so money is added to the system instead of taken out.

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