VRR  is a type of liquidity adjustment tool used by the RBI, where banks can borrow funds for short-term at market-determined interest rates through an auction mechanism.

How does it work?

• RBI conducts VRR auctions where banks bid for funds, specifying amounts and interest rates they are willing to pay. The RBI accepts the lowest (most favourable) bids to determine the cutoff rate, which becomes the variable repo rate for that auction, typically for tenures of 1-14 days.

Features

• Market-driven rates, unlike the fixed repo rate set by RBI’s Monetary Policy Committee.
• Provides flexibility during liquidity shortages when banks avoid fixed-rate borrowing.
• Ensures rates stay above the reverse repo rate floor for monetary stability.

Source: The Hindu Businessline