Variable Reverse Repo Rate (VRRR)

Subject – Economy

Context – RBI increases 14-day VRRR amount in December to shift out of overnight auctions

Concept –

RBI’s rebalancing of liquidity management started in February 2020, as the central bank shifted its liquidity absorption tool out of the fixed-rate overnight reverse repo window into VRRR auctions of longer maturity.
In order to absorb additional liquidity in the system, the RBI announced conducting a VRRR program because it has higher yield prospects as compared to the fixed rate overnight reverse repo.
The Reserve Bank of India (RBI) has increased the amount of variable rate reverse repo (VRRR) auctions in December, as it is shifting out of the fixed-rate overnight reverse repo auction and re-establishing VRRR as the main liquidity management operations
The amount under the 14-day VRRR auctions on a fortnightly basis has been increased to Rs 6.5 lakh crore for December 17 and further to Rs 7.5 lakh crore for December 31.
- While from January 2022 onwards, liquidity absorption will be undertaken mainly through the auction route.
Market participants expect the heavy liquidity withdrawal from the system will pull overnight rates near to repo rate, this would mean that accrual returns on a very short-term, low market risk products like overnight and liquid funds could rise in the coming months.