Variable Rate Repo and Reverse Repo

Variable Rate Repo and Reverse Repo operations are the discretionary, auction-based arms of the Reserve Bank of India's Liquidity Adjustment Facility (LAF), introduced as standing instruments under the revised liquidity management framework that the RBI announced on 5 February 2020 and operationalised over the following months. Their statutory foundation rests in the RBI Act, 1934 — particularly the powers of the central bank to conduct open-market and repurchase transactions — and in the operating procedures of monetary policy framed by the Monetary Policy Committee constituted under the amended Act of 2016. Whereas the fixed-rate repo and reverse repo windows transact at rates pre-set by the MPC (the repo rate and the standing deposit facility/reverse repo rate), the variable rate instruments transact at rates discovered through competitive bidding, allowing the RBI to inject or absorb liquidity in calibrated quantities while letting the market set the price within a corridor.

The mechanics proceed through a multiple-price (American) auction conducted on the RBI's e-Kuber platform. In a Variable Rate Repo (VRR) auction the RBI injects liquidity: it announces a notified amount and tenor, and eligible counterparties — scheduled commercial banks and primary dealers holding current and SGL accounts — submit bids stating the amount they want and the rate they are willing to pay, which must be at or above the prevailing repo rate (the floor). Bids are arranged in descending order of rate, and the RBI accepts them from the highest downward until the notified amount is exhausted; each successful bidder pays its own bid rate. Banks pledge SLR-eligible government securities as collateral, subject to a haircut, and the securities revert on maturity when the funds are repaid.

A Variable Rate Reverse Repo (VRRR) auction inverts this logic to absorb surplus liquidity. The RBI announces a notified amount and tenor and invites banks to park funds with it; bids are quoted as the rate banks are willing to accept, capped at the repo rate, and the RBI accepts bids from the lowest rate upward until the notified quantum is filled. Tenors range from overnight to fortnightly (14-day operations being the designated "main" operation under the 2020 framework) and out to longer "fine-tuning" durations of 28 or 56 days. The 14-day VRR/VRRR anchored to the reserve maintenance cycle was conceived as the principal tool, supplemented by fine-tuning auctions of varying maturities to manage frictional and transient liquidity mismatches arising from currency demand, government cash balances and capital flows.

Contemporary practice has made these auctions central to RBI liquidity management. Through the post-pandemic liquidity overhang of 2021–22, the RBI under Governor Shaktikanta Das relied heavily on VRRR auctions — including 14-day and longer 28-day operations announced through 2021 — to gradually drain the large surplus created by its asset purchases without raising the policy rate. As the cycle turned and the banking system swung into deficit during late 2024 and 2025, the RBI under Governor Sanjay Malhotra deployed frequent VRR auctions, some of multi-day and 14-day tenor, alongside daily overnight operations, to keep the weighted average call rate (WACR) — its operating target — aligned with the repo rate. The Mumbai-based Financial Markets Operations Department publishes auction results the same day.

These instruments must be distinguished from the adjacent fixed-rate facilities. The Marginal Standing Facility (MSF) and, since April 2022, the Standing Deposit Facility (SDF) are standing windows available on demand at administered rates that define the LAF corridor's ceiling and floor respectively; banks access them at the central bank's discretion-free rates without bidding. By contrast VRR/VRRR are discretionary RBI-initiated auctions whose timing, quantum and tenor the RBI controls, and whose rate the market discovers. They also differ from Open Market Operations (OMO), which are outright permanent purchases or sales of securities that alter durable liquidity, and from foreign-exchange swaps; VRR/VRRR are temporary, collateralised, self-reversing transactions that address frictional liquidity.

A recurring point of debate concerns the corridor and the operating target. When liquidity is in large surplus, VRRR cut-off rates can drift toward the SDF floor, pulling the WACR below the repo rate; when deficits bite, VRR cut-offs rise toward the MSF ceiling. The RBI's October 2024 internal review and subsequent commentary examined whether the 14-day main operation remained fit for purpose given volatile government cash flows, and the bank increasingly shifted toward more frequent, days-matched fine-tuning auctions. The 2025 episodes of tight liquidity prompted the RBI to combine VRR auctions with OMO purchases and CRR cuts, illustrating that variable-rate auctions manage transient conditions while durable liquidity requires structural tools.

For the working practitioner — whether a treasury desk officer, a policy researcher or a UPSC GS-3 aspirant — Variable Rate Repo and Reverse Repo represent the operational fulcrum on which day-to-day monetary transmission turns. The MPC sets the repo rate, but it is the sequencing, frequency and tenor of these auctions that determine whether the overnight rate actually settles at the policy rate, and therefore how effectively rate decisions reach the wider economy. Reading VRR/VRRR auction calendars, notified amounts and cut-off rates offers a near-real-time gauge of the RBI's liquidity stance and its assessment of systemic conditions, making them indispensable to anyone tracking Indian monetary policy.