Key Facts and Data Points
- Liquidity injected via VRR (3‑day auction): Over Rs 25,000 crore.
- Liquidity added through OMO since Jan 2026: Rs 3.5 lakh crore.
- Current Fixed Repo Rate (policy rate): 5.25%.
- VRR tenor: 1 to 14 days, collateral – eligible Government Securities.
- LAF corridor components:
- Ceiling: Marginal Standing Facility (MSF) – repo + 25 bps.
- Policy rate (center): Repo Rate.
- Floor: Standing Deposit Facility (SDF) – repo – 25 bps.
Background and Context
- Liquidity Adjustment Facility (LAF): Introduced in 2000 (Narasimham Committee recommendations) to manage day‑to‑day liquidity mismatches.
- Variable Rate Repo (VRR): Market‑driven auction where banks bid for funds; the cut‑off rate is the highest accepted bid.
- Variable Rate Reverse Repo (VRRR): Counter‑part tool to absorb excess liquidity.
- Open Market Operations (OMO): Buying/selling of G‑Secs to inject/absorb liquidity; executed via the RBI’s e‑Kuber platform.
Significance for India / Governance / Policy
- Fine‑tuning liquidity: VRR allows the RBI to respond swiftly to temporary deficits (e.g., festive cash withdrawals, tax outflows).
- Market discovery: By letting banks set the rate, the RBI avoids “guesswork” and obtains a realistic cost of funds.
- Stabilising the WACR: Keeping the Weighted Average Call Rate close to the repo rate ensures stability in short‑term interest rates, influencing borrowing costs for businesses and households.
- Policy signalling: While Fixed Repo signals the long‑term stance, VRR signals short‑term adjustments, aiding transparent monetary policy transmission.
Related Constitutional / Legal Provisions
- RBI Act, 1934 (as amended): Empowers the RBI to conduct repo and reverse‑repo operations, and to issue directions for maintaining monetary stability.
- Monetary Policy Committee (MPC) under the RBI Act: Decides the policy repo rate and overall stance of monetary policy.
Important Comparisons
| Feature | Variable Rate Repo (VRR) | Fixed Repo Rate |
|---|---|---|
| Interest Rate Determination | Market‑driven auction | Pre‑set by RBI (policy rate) |
| Purpose | Fine‑tune short‑term liquidity | Signal long‑term policy stance |
| Flexibility | High – reflects real‑time demand | Low – uniform rate |
Frequently Asked Questions (FAQs)
- Primary difference between Fixed Repo and VRR?
- Fixed Repo uses a pre‑set policy rate; VRR’s rate is decided through competitive bidding.
- Role of Standing Deposit Facility (SDF)?
- Acts as the floor of the LAF corridor, allowing banks to park surplus funds at a rate ~25 bps below the repo rate without collateral.
- Why is Weighted Average Call Rate (WACR) the operating target?
- It reflects the actual overnight inter‑bank funding cost; RBI uses LAF tools to keep it near the policy repo rate.
- Purpose of Marginal Standing Facility (MSF)?
- Provides a safety valve (ceiling) for banks to obtain emergency funds against their SLR quota.
Relevance for UPSC
- Prelims: Memorise amounts, definitions, and the structure of LAF.
- Mains: Analyse how VRR enhances monetary policy transmission and its impact on inflation, credit growth, and financial stability.
- Essay/GS‑2: Discuss the evolution of RBI’s liquidity management tools and their role in a developing economy.