The Reserve Bank of India (RBI), the country’s central bank, announced a two-day Variable Rate Repo (VRR) auction today, May 22nd, 2024. This might sound complex, but let’s break it down to understand what it means.
What’s a VRR Auction?
A VRR auction is a tool the RBI uses to manage the amount of cash available in banks. Here’s how it works:
- Banks Park Money: During a VRR auction, banks can offer to lend some of their surplus cash to the RBI for a short period (usually one or seven days).
- RBI Sets a Rate: The RBI sets an interest rate that it will pay banks for lending their money. This rate can vary depending on market conditions.
- Controlling Cash Flow: By accepting or rejecting bids from banks, the RBI can control the overall amount of money circulating in the banking system.
The Reserve Bank of India (RBI) announced on May 22 that it will hold a two-day variable rate repo auction for Rs 75,000 crore.
“After assessing the present liquidity situation, the central bank has chosen to hold a Variable Rate Repo (VRR) auction on May 22,” stated the release.
This auction aims to manage liquidity conditions in the banking system. Bidding took place between 11:30 am and 12 pm, with funds being reversed on May 24.
The central bank typically holds a variable rate repo auction when there is a shortage or tightness in liquidity within the banking system.
Variable rate repo auctions are typically conducted when there is a shortage of liquidity in the banking system. Currently, the system is estimated to be short of around Rs 2.56 lakh crore.
On May 21, the RBI also conducted a three-day variable rate repo auction for Rs 1.25 lakh crore, accepting bids worth the same amount.
