RBI manages short-term liquidity via VRR: Know more about it

Variable Repo rate or VRR is the monetary tool used by the Reserve Bank of India (RBI) for managing short-term liquidity. It is used as a temporary measure for injecting short-term liquidity into the system and thus checking for any crisis or shortages.

Herein, based on the liquidity needs, the apex banker- Reserve Bank of India comes up with an auction for a specified amount that typically lasts between 1-14 days and based on their need, commercial bankers make a bid with the interest rate they are willing to offer.

RBI goes for the favourable bid in respect of the amount and the interest rate metric. This is done while making sure that the VRR rate is well above the reverse repo rate, i.e. the interest rate RBI pays lenders in India for keeping excess cash - currently at 3.35%.

Notably, the key policy repo rate is the interest rate at which commercial banks in India borrow from the RBI. The VRR option adjusts as per the real-time market dynamics of demand and supply.

If the VRR rate, in light of the tightened liquidity trends, rises, there is a direct rub-off effect on loan rates, which may also move higher. However, in a case when the RBI resorts to fewer VRR auctions, reflecting manageable liquidity in the short term, the impact on borrowers shall not be there.

Who all should be keeping a close watch on the RBI’s VRR auction?

RBI’s variable repo rate auction (VRR) should be closely monitored by borrowers, investors, and anyone in the financial industry. This is because VRR is a metric that can help in forecasting for any EMI hikes in cases when VRR trends higher or during tightened liquidity conditions. Also, a higher VRR rate has a direct bearing on the stock markets; it benefits bullion when there is pressure on the rupee.