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RBI conducts an overnight Variable Rate Reverse Repo auction
સમાચારમાં કેમ?
Why does RBI drain cash overnight? The VRRR auction under LAF that Prelims economy questions test
RBI uses a VRRR auction to mop up surplus liquidity.
Why it matters: asked in UPSC 2013; factual, Prelims-type
What you need to know
2 મિનિટ
On a review of liquidity conditions, the Reserve Bank of India decided to hold an overnight Variable Rate Reverse Repo (VRRR) auction under the Liquidity Adjustment Facility on 6 October.
A VRRR auction absorbs surplus liquidity from the banking system at a rate discovered through bidding.
It follows an earlier VRRR auction held on 5 October.
સ્રોત: Topper IAS editorial (PIB / The Hindu / Indian Express)
મુખ્ય તથ્યો
Remember these
- RBI held an overnight Variable Rate Reverse Repo (VRRR) auction on 6 October, after an earlier one on 5 October.
- VRRR is conducted under the Liquidity Adjustment Facility (LAF) to absorb surplus liquidity from the banking system.
- The rate in a VRRR auction is discovered through bidding by banks, unlike the fixed-rate reverse repo.
- A reverse repo drains money out of the system, whereas a repo injects liquidity.
- The policy repo rate is set by the Monetary Policy Committee (MPC), not by VRRR auctions.
પ્રિલિમ્સ · મેઇન્સ
How the exam will ask it
પ્રિલિમ્સ
- The Liquidity Adjustment Facility includes repo and reverse repo operations through which RBI manages day-to-day liquidity.
- A Variable Rate Reverse Repo auction absorbs surplus liquidity at a rate determined by competitive bidding.
- A reverse repo operation reduces liquidity in the banking system, while a repo operation increases it.
- The policy repo rate is decided by the Monetary Policy Committee, not through liquidity auctions.
મેઇન્સ
GS3 Economy (monetary policy): surplus liquidity can weaken transmission of the policy rate and fuel inflation, so RBI uses LAF tools such as VRRR auctions to keep short-term rates near the policy corridor. Variable-rate auctions let the market discover the price of absorbing funds, unlike fixed-rate windows. The way forward is calibrated, transparent liquidity management that balances inflation control with credit growth.
PYQ connection
A question UPSC has already asked on this
In the context of Indian economy, 'Open Market Operations' refers to
- borrowing by scheduled banks from the RBI
- lending by commercial banks to industry and trade
- purchase and sale of government securities by the RBI
- None of the above
જવાબ જુઓ
જવાબ: C
Why this matters: today's issue is directly connected to a concept UPSC has already tested. Read the story with this question in mind.
Practise this PYQ →Quick recall
Answer before you reveal
In the Reserve Bank of India's Liquidity Adjustment Facility, a Variable Rate Reverse Repo (VRRR) auction is conducted mainly to:
- Inject liquidity into banks
- Raise the Cash Reserve Ratio
- Reset the policy repo rate
- Absorb excess liquidity
જવાબ જુઓ
જવાબ: D — Correct: Absorb excess liquidity — A VRRR auction absorbs surplus liquidity from the banking system at a rate discovered through bidding. • Inject liquidity into banks — wrong: Injecting liquidity is done through repo operations, whereas a reverse repo draws money out of the system. • Raise the Cash Reserve Ratio — wrong: The Cash Reserve Ratio is changed by a separate policy decision, not through a VRRR auction. • Reset the policy repo rate — wrong: The policy repo rate is set by the Monetary Policy Committee, not reset through a VRRR auction.
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