- The Reserve Bank of India (RBI) absorbed surplus liquidity aggregating ₹44,430 crore through two variable Rate Reverse Repo (VRRR) auctions of three days tenor.
- The objective of establishing VRRR auction as the liquidity management tool is to strengthen the Reserve Bank’s control over liquidity.
- The RBI pays interest to the banks for lending money to it. The interest rate is determined by the market forces of demand and supply of liquidity.
- On the first 3 days VRRR auction, the central bank accepted the funds at a weighted average rate (WAR) of 6.48%. In the second VRRR auction at a WAR of 6.49%.
- Liquidity surplus with banks was mainly on account of month-end government spending.
- RBI’s dividend pay-out announcement (of ₹2.1-lakh crore) in end-May and the post-election pent-up spending by the government, should bode well for banking system liquidity.
Rebalancing surplus liquidity
- The Reserve Bank has been rebalancing the liquidity surplus by shifting it from the fixed rate overnight reverse repo window to the variable rate reverse repo (VRRR) auctions of longer maturity.
- The banks can bid for the amount and the rate at which they are willing to lend money to the RBI.
- The RBI decides the cut-off rate and the amount based on the bids received, banks can not bid at or below the repo rate.
- The banks that have placed their bids at or above the cut-off rate are allotted funds.
Dig Deeper: Read about RBI’s various tools to manage liquidity.
