Term of the day: Variable Rate Reverse Repo (VRRR) auction: | ECONOMY by VIVEK SINGH

Term of the day:

Variable Rate Reverse Repo (VRRR) auction:

When banks would like, they can keep/deposit money with RBI at (fixed) reverse repo for overnight without any limit. (presently there is no limit how much funds bank can keep but it can change with time)

But if RBI is seeing that the economy is flush with liquidity and/or inflation is high (which is presently the condition) then on RBI's discretion, it conducts VRRR auction. RBI will ask banks that you can keep/deposit money with RBI and RBI will pay interest above reverse repo rate (and below repo rate) BUT that rate will be decided through auction. So, let us say RBI wants to absorb Rs. 50,000 crore liquidity then RBI will select those banks which quotes (asks for) minimum interest rate above reverse repo rate. This VRRR auction can be for overnight or for longer period.

So, 'reverse repo' is a monetary policy tool and VRRR is also a monetary policy tool.