Variable Rate Repo auction under LAF

Variable Rate Repo auction under LAF

Subject – Economy

Context – RBI holds variable repo auction as GST outflow tightens liquidity

Concept –

• Call money market is a market for uncollateralised lending and borrowing of funds. This market is predominantly overnight and is open for participation only to scheduled commercial banks and the primary dealers.
• Reserve Bank has been rebalancing the surplus liquidity in the system by shifting it out of the fixed rate overnight reverse repo window into the variable rate reverse repo (VRRR) auctions of longer maturity.

Operational Guidelines:

1) The auction will be conducted on CBS (e-Kuber) platform.

2) The minimum bid amount for the auction would be Rupees one crore and multiples thereof. The allotment would be in multiples of Rupees one crore.

3) Banks would be required to place their bids in percentage terms up to two decimal places. Banks can place multiple bids.

4) Successful bids will get accepted at their respective bid rates.

5) Bids at or below the repo rate will be rejected.

6) Once the bidding time is over, all the bids would be arranged in descending order of the rates quoted and the cut-off rate would be arrived at the rate corresponding to the notified amount of the auction. Successful bidders would be those who have placed their bids at or above the cut-off rate. All bids lower than the cut-off rate would be rejected.

7) There will be provision of pro-rata allotment should there be more than one successful bid at the cut-off rate.

8) RBI will, however, reserve the right to (i) inject marginally higher amount than the notified amount due to rounding effects and (ii) inject less than the notified amount without assigning any reasons there for.

9) The reversal of the above auction would take place at the ‘start of day’ on the date of reversal.

10) The eligible collateral and the applicable haircuts will remain the same as for LAF.

11) All other terms and conditions as applicable to LAF operations will also be made applicable to the above auction mutatis mutandis. These conditions will, however, be subject to review on a periodic basis.

Liquidity Adjustment Facility (LAF):

It is a tool used in monetary policy by the RBI that allows banks to borrow money through repurchase agreements (repos) or for banks to make loans to the RBI through reverse repo agreements.

Repo and Reverse Repo Rate:

• Repo rate is the rate at which the central bank of a country (Reserve Bank of India in case of India) lends money to commercial banks in the event of any shortfall of funds. Here, the central bank purchases the security.
• Reverse repo rate is the rate at which the RBI borrows money from commercial banks within the country.

To know about Variable Reverse Repo Rate (VRRR), please refer December 2021 DPN.