The central bank of India will conduct a 14-day variable rate reverse repo (VRRR) auction from 10.30 am to 11 am on Friday. According to a statement from Reserve Bank of India (RBI), the VRRR auction is conducted for a notified amount of ₹50,000 crore.
The reversal of the auction will begin at the ‘start of day’ on March 10.
What is VRRR auction, why is it done?
Repo rate is the rate at which the central bank issues loans to commercial banks in case of shortage of funds. It is used to control inflation. A reverse repo is a fixed or variable interest rate at which banks lend to RBI. VRRR is a subdivision of reverse repo. The VRRR is usually undertaken to reduce surplus liquidity by withdrawing existing cash in the system.
RBI Governor Shaktikanta Das on Wednesday said that the overall liquidity remains in excess, with average daily absorption under the Liquidity Adjustment Facility (LAF) increasing to ₹1.6 lakh crore in the December-January period from an average of ₹1.4 lakh crore in October-November.
LAF allows banks to borrow money through repos and lend funds to the RBI through reverse repo agreements.
Operational guidelines:
1) According to a LiveMint report, the auction will be conducted on CBS (e-Kuber) platform and the minimum bid amount is ₹1 crore its multiples.
2) Banks can place multiple bids in percentage terms up to two decimal places. However, all bids higher than the repo rate will be rejected.
3) Once the auction time is over, all the bids would be arranged in ascending order and the cut-off rate would be decided in proportion to the notified amount.
4) In case of more than one successful bid at the cut-off rate, there will be an option for pro-rata allotment.
5) RBI will, however, reserve the right to (i) absorb marginally higher amount than the notified amount due to rounding effects and (ii) absorb less than the notified amount without assigning any reasons therefore.