Context:
The RBI injected ₹81,590 crore into the banking system through a three-day Variable Rate Repo auction. This was done to manage temporary liquidity fluctuations, as banking system surplus liquidity had sharply declined.
- Liquidity refers to the availability of cash or easily usable funds in the financial system.
- When banks face short-term shortage of funds, RBI can inject liquidity so that money market rates remain stable.
- Transient liquidity means temporary liquidity stress caused by short-term factors such as tax outflows, government cash balances, currency demand, or market settlement pressures.
- Repo means banks borrow money from RBI by selling government securities with an agreement to repurchase them later.
- Variable Rate Repo (VRR) is a liquidity injection tool where RBI lends money to banks, but the interest rate is decided through auction.
- In a fixed rate repo, the rate is pre-decided by RBI; in VRR, banks bid for funds and the cut-off rate emerges through auction.
- VRR is part of RBI’s Liquidity Adjustment Facility (LAF) framework.
- It helps RBI manage short-term liquidity without changing the policy repo rate.
- A cut-off rate is the rate at which the final accepted bid gets funds in the auction.
- If demand is lower than the notified amount, it may show that banks are not facing severe liquidity stress.
- Such operations are important for monetary transmission, call money rate stability, and overall financial market stability.
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