We generally heard about Repo Rate and Reverse Repo Rate but along with these instruments, RBI also use Variable Repo Rate (VRR) and Variable Reverse Repo Rate (VRRR) also called Term Repo Rates or Term Reverse Repo Rates for achieving monetary policy objectives or more specifically for liquidity management (availability of money) in the economy.
In this article, we will explain in detail about Variable Repo Rate and how it is different from Repo Rate.
Before, explaining Variable Repo Rate & Variable Reverse Repo Rates , Lets first understand what do we mean by Repo Rates & Reverse Repo Rates.
Repo Rates: Repo Rate in simple term is the rate at which Banks borrows money from RBI for one day also known as overnight borrowing. It is also called Re-purchase agreements as in this case, Banks Sells Government Securities to RBI at lets say (Rs.100), then purchase the same securities from RBI at (Rs100+X) on next day being X is calculated at rate of interest equal to Repo Rate as decided by the RBI.
Through Repo Rate, RBI enhances liquidity (availability of money) in the economy as more money is flown from RBI to Banks and in turn to economy. Increase in liquidity helps the economy to grow, though it will increase inflation in the economy. That's why when RBI wants to assist growth, Repo Rates are decreased by the RBI. Here borrowing Rate of interest/Repo Rates are fixed by the RBI like at present it is 6.5% (as of 23.08.2023). Repo Rate is also called Policy Rate.
Reverse Repo Rates : Reverse Repo Rate is just opposite of Repo Rate, it is the rate which Bank gets from RBI when they deposit money with RBI for one day. Reverse Repo Rate is also fixed by the RBI like at present it is 3.35% (as of 23.08.2023).
Through Reverse Repo Rate, RBI decrease the liquidity (availability of money) in the economy as more money is flown from Banks and in turn from economy to RBI. Decrease in liquidity helps the RBI to tackle the problem of inflation though it may hurts the growth of economy.
Now we will discuss Variable Reverse Repo Rates and Variable Repo Rates
Variable Reverse Repo Rate: Many of times, it may happen that when RBI desires that liquidity should be squeezed from the economy but Banks are not eager to deposit money with RBI at rate fixed by RBI as there may be case that rate of interest in market is higher than Reverse Repo Rate as fixed by RBI. Like, for the better part of 2021, banks have been depositing close Rs 8-10 lakh crore everyday with the RBI through the fixed rate reverse repo window earning just 3.35 percent. This has now come down to Rs 2 lakh crore a day.
To tackle this situation, RBI comes up with instrument of Variable Reverse Repo Rate where Rate of interest is not fixed by RBI but by the market through auction. For instance, against Reverse Repo Rate of 3.35%, VRRR of 2 days in July 2023 was decided at 6.49% through auction (VRRR can not be more than Repo Rate i.e. 6.5%).
Another difference between Reverse Repo and Variable Reverse Repo Rate is of duration. While Reverse Repo is for Overnight or One day, Variable Reverse Repo are for more than one day (generally 14 days, however it can be less like 2, 3, 7, 10 days etc.) That's why, Variable Reverse Repo are also called Term Reverse Repo.
Variable Repo Rate: Just like Variable Reverse Repo Rate, when RBI desires to infuse liquidity in economy but Banks are not eager to borrow from RBI at Repo Rates as interest rates in economy may already be lower, in that case RBI allows Banks to borrow at rate decided by market generally lower than Repo Rate (though not less than Reverse Repo Rate) for duration more than One Day.
Disclaimer: We have used information from multiple sources for purely academic purpose. In case of any correction and/or objection, please reach us.