Reserve Bank of India (RBI) recently conducted VRRR auctions to drain out liquidity
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In normal scenarios, to infuse liquidity RBI lends to Banks at
Repo Rate and to reduce excess liquidity RBI accepts funds from Banks at
Reverse Repo Rate.
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So essentially,
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Repo Rate is the rate at which Banks borrow funds from RBI
overnight.
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Reverse Repo Rate is the rate which Banks get when they park
their funds with RBI for overnight.
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Over and above these facilities to borrow or deposit funds with
the RBI, banks also access the money market for the purpose of liquidity
management, where banks lend overnight to each other.
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The rate at which interbank lending-borrowing takes place in the
money market is known as Call Rate.
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RBI sees to it that the Weighted Average Call Rate (WACR) is
well aligned with the Repo Rate.
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When there is too much excess liquidity in the system, the call
rate in the money market falls below Repo Rate, thus banks find it less
attractive to borrow from RBI at Repo Rate.
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Thus to align the call rate again, RBI conducts Variable Reverse
Repo Rate (VRRR) auction to drain out excess liquidity, where the rate will not
be fixed by RBI but will be decided by the market through an auction i.e.,
Variable Reverse Repo Rate (VRRR).
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And when there is a liquidity deficit in the system, the call
rate in the money market inches up above the Repo Rate.
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And to align the call rate again with the Repo Rate, RBI
conducts Variable Repo Rate (VRR) auction to infuse liquidity, where the rate
will not be fixed by RBI but will be decided by the market through an auction
i.e., Variable Repo Rate (VRR).
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There is so much more to discuss. Will come up with the 2nd part
soon.
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