The Reserve Bank of India (RBI) recently infused over ₹25,000 crore into the banking system through a 3-day Variable Rate Repo (VRR) auction. Prior to this, it had already injected around ₹3.5 lakh crore through Open Market Operations (OMO) since January 2026, indicating active liquidity management.
What is Variable Rate Repo (VRR)?
About
The Variable Rate Repo (VRR) is a short-term liquidity injection tool used by the RBI. It allows banks to borrow funds from the RBI, but unlike the fixed repo rate, the interest rate is determined through a market-based auction.
Auction Mechanism
In a VRR auction, banks bid for funds based on their liquidity needs. The RBI accepts bids starting from the highest interest rates, and the cut-off rate is determined accordingly. This ensures that the rate reflects real-time market demand.
Tenor and Collateral
VRR operations are usually conducted for short durations ranging from 1 to 14 days. Banks are required to provide government securities (G-Secs) as collateral while borrowing funds.
Significance of VRR
The VRR plays a crucial role in fine-tuning liquidity in the banking system. It helps maintain the Weighted Average Call Rate (WACR) close to the policy repo rate. It also enables efficient price discovery and allows the RBI to respond quickly to temporary liquidity shortages.
Difference Between VRR and Fixed Repo Rate
The VRR differs from the fixed repo rate in several ways. In VRR, the interest rate is market-determined, making it more flexible and responsive to short-term conditions. In contrast, the fixed repo rate is set by the RBI and serves as a signal of long-term monetary policy stance.
Liquidity Adjustment Facility (LAF)
The Liquidity Adjustment Facility (LAF) is the RBI’s core monetary policy framework for managing day-to-day liquidity mismatches. It was introduced in 2000.
Components of LAF
The LAF operates mainly through:
Repo Rate: The rate at which RBI lends money to banks (liquidity injection).
Reverse Repo / Standing Deposit Facility (SDF): The rate at which RBI absorbs excess liquidity.
Marginal Standing Facility (MSF): A penal borrowing window for banks in emergencies.
LAF Corridor
The RBI maintains an interest rate corridor:
Upper limit: MSF
Middle: Repo rate
Lower limit: SDF
This ensures that short-term interest rates like the WACR remain stable and aligned with policy objectives.
Open Market Operations (OMO)
Open Market Operations (OMO) refer to the buying and selling of government securities by the RBI to regulate liquidity in the economy.
Function
When the RBI purchases securities, it injects liquidity into the banking system. When it sells securities, it absorbs excess liquidity, thereby controlling the money supply.
Execution
OMOs are conducted through auctions or direct transactions using the RBI’s E-Kuber digital platform.
Conclusion
The RBI uses tools like VRR, LAF, and OMO to ensure liquidity stability and smooth functioning of financial markets. The recent liquidity infusion highlights the RBI’s proactive approach in managing short-term liquidity pressures while maintaining overall monetary stability.
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In every Lecture. Director Sir will provide conceptual understanding with around 800 Mindmaps.
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