VRR & VRRR
The Reserve Bank of India (RBI) has frequently deployed Variable Rate Repo (VRR) and Variable Rate Reverse Repo (VRRR) auctions in recent monetary operations to manage liquidity surpluses and deficits in the banking system. These tools gained prominence after the pandemic-era liquidity glut and are now central to the RBI’s Liquidity Adjustment Facility (LAF) strategy.
What is VRR (Variable Rate Repo)?
The Variable Rate Repo (VRR) is a liquidity injection tool where banks borrow funds from the RBI by offering eligible government securities as collateral. Unlike the fixed rate repo (where the repo rate is predetermined), in VRR:
The interest rate is market-determined through an auction process.
Banks bid for borrowing funds, quoting the interest rate they are willing to pay.
The lowest rate accepted is called the cut-off rate, and the RBI accepts bids at or above this rate.
VRR is used by the RBI to infuse liquidity when there is a shortage of funds in the banking system.
What is VRRR (Variable Rate Reverse Repo)?
The Variable Rate Reverse Repo (VRRR) is a liquidity absorption tool used when there is excess liquidity in the system. In this, banks park their surplus funds with the RBI, quoting the minimum interest rate they are willing to accept:
It helps the RBI mop up surplus liquidity, reducing inflationary pressures.
The auction allows banks to compete for the best reverse repo rate
The RBI accepts bids at or below the cut-off rate, and this rate decides the effective yield for banks.
VRRR has become increasingly relevant post-COVID as the banking system dealt with large surplus liquidity from stimulus measures.
Key Differences Between VRR and VRRR
Feature
VRR
Inject liquidity into the system
Absorb excess liquidity
Purpose
Provides funds to banks
Takes funds from banks
Action by RBI
Banks offer govt. securities
Not required (RBI accepts deposits)
Collateral
Impact on Liquidity
Increases liquidity
Decreases liquidity
Who Bids?
Banks bid to borrow
Banks bid to lend
Impact on Interest Rates Can push rates down
Can push rates up
In VRR, banks borrow funds from RBI, thereby increasing market liquidity. This is usually done when there is a tightness in funds and short-term rates are spiking.
In VRRR, the RBI pulls excess funds from the market by accepting deposits from banks, thus
reducing liquidity and cooling inflationary trends
Why are VRR and VRRR Important?
1. Liquidity Management: They are vital to fine-tune short-term liquidity conditions and maintain the policy corridor between repo and reverse repo rates.
2. Market Signalling: VRR and VRRR outcomes provide signals on how tight or loose liquidity is in the system, reflecting market expectations about future rate changes.
3.Inflation Control:By absorbing excess liquidity through VRRR, the RBI controls inflation, aligning with its inflation targeting mandate.
4.Post-COVID NormalisationWith abundant liquidity post-COVID, VRRR was extensively used to withdraw liquidity in a calibrated manner without destabilising markets.
Recent Trends and RBI Strategy
RBI has moved from fixed rate reverse repos to VRRRs to make liquidity absorption more dynamic and market-determined.
In the June and July 2025 monetary policy reviews, VRRR auctions were conducted for tenures ranging from 14 to 28 days, signalling a shift toward durable liquidity management.
Simultaneously, VRR auctions have been limited as there is no acute liquidity shortage currently.
VRR and VRRR auctions are not just technical operations-they are instruments of macroeconomic signalling and monetary discipline. By finely adjusting the flow of money in the system, these tools help keep inflation within target and interest rates aligned with growth goals.
As India navigates the post-pandemic recovery and transitions toward high-growth equilibrium, smart liquidity management via VRR and VRRR will remain critical to monetary stability, inflation control, and sustainable credit growth.