Discuss the tools available with the RBI to manage liquidity in the banking system. How does the Variable Rate Reverse Repo differ from conventional reverse repo operations?

Liquidity management is how the RBI keeps the overnight weighted average call rate (WACR) — its operating target — aligned with the policy repo rate [1]. Its toolkit ranges from standing facilities to market operations, of which the Variable Rate Reverse Repo (VRRR) has become the workhorse for absorbing surplus funds.

RBI's liquidity toolkit

• Corridor instruments: the repo injects funds at the policy rate; the Standing Deposit Facility (SDF), 25 bps below repo, absorbs funds uncollateralised and forms the floor; the Marginal Standing Facility (MSF), 25 bps above, is the ceiling [1][2].
• Fine-tuning operations: Variable Rate Repo (VRR) to inject and VRRR to absorb, conducted primarily at 7-day tenor and other tenors from overnight up to 14 days under the revised framework of September 2025 [1].
• Durable liquidity tools: Open Market Operations (outright purchase/sale of G-secs), long-term VRR/VRRR, and forex swap auctions [1].
• Statutory levers: CRR and SLR, used for structural rather than day-to-day adjustment.
• Scale in practice: amid a large 2026 surplus driven by heavy external and NRI deposit inflows, RBI notified VRRR auctions of ₹7 lakh crore (4 September) and ₹5 lakh crore overnight (8 September) [3][4]; daily absorption is published in Money Market Operations data [5].

VRRR versus conventional reverse repo

• Rate: market-discovered cut-off rate through competitive bidding, against a fixed rate pre-announced by RBI.
• Quantum: RBI notifies an amount and banks bid, so auctions can be undersubscribed; the fixed-rate window absorbs whatever banks place.
• Tenor: overnight up to 14 days and longer, versus overnight only [1].
• Nature: VRRR is collateralised by government securities and discretionary; the SDF that replaced the fixed reverse repo as the corridor floor needs no collateral [2].

Thus VRRR gives the RBI calibrated, price-discovering control over transient liquidity, while OMOs and CRR address durable imbalances. A layered, well-signalled framework — tactical absorption plus durable operations — best preserves monetary transmission and anchors the call rate to the policy stance.