Prelims: Current events of national and international importance | Economy
Why in news?
Reserve Bank of India (RBI) has absorbed Rs. 71,971 crore liquidity from the banking system through an overnight Variable Reverse Repo Rate (VRRR) auction.
- VRRR – It is the rate at which banks park surplus funds with the Reserve Bank of India (RBI).
- It is a monetary policy tool used by central banks to absorb excess liquidity from the banking system.
- VRRR auction – It was held for Rs. 75,000 crore, and offers were received for 96% of the amount at a rate of 5.24%.
- The overnight facility had a tenor of one day.
- Reasons for surplus liquidity –
- Heavy mobilisation of Foreign Currency Non-Resident deposits,
- Subsequent currency swaps with the central bank, and
- Month-end government expenditure on salaries and pensions.
- Current liquidity status – As per the RBI data, currently, surplus liquidity in the banking system is estimated to be around 4.92 lakh crore rupees.
- To manage these conditions, the central bank also conducted two open market operations (OMOs).
- Working of VRRR
- Liquidity absorption – Central banks (like the Reserve Bank of India) use VRRR to absorb surplus cash when liquidity is high.
- Auction mechanism – Unlike a fixed rate, banks bid competitively by quoting the interest rate they are willing to accept.
- Rate determination – The RBI accepts bids from the lowest rate upward until the notified amount is filled.
- Market alignment – It helps align the overnight money market rates with the benchmark policy repo rate ahead of a potential rate hike cycle.
Reference
The Hindu | RBI absorbs ₹71,971 crore liquidity from banks
