RBI Is Withdrawing Rs 25000 Crore From India's System - What Does It Mean?

At a time when liquidity is a concern, the Reserve Bank of India is sucking Rs 25000 crore from India's banking system. In a notification issued on Thursday, RBI said that the central bank will conduct a Variable Rate Reverse Repo (VRRR) auction on November 29. The auction will be undertaken for a period of 14 days. “ It has been decided to conduct a Variable Rate Reverse Repo (VRRR) auction on November 29, 2024, Friday,” the RBI said in a statement on Thursday.

Why is RBI withdrawing money from the system?

Liquidity management is among several functions of the RBI. RBI facilitates liquidity under the Liquidity Management Framework, in which it either conducts a repo auction or a reverse repo auction.

The decision to conduct a reverse repo auction is an unexpected move from the RBI. It can, however, be viewed against the backdrop that India's banking system is grappling with liquidity deficit following GST payments and forex outflows amounting to $25 billion in the past two months.

VRRR is a tool used by the central bank to seek funds from the banks. Banks will be parking their funds with the RBI for a specific period and RBI will be paying them interest on those funds on the basis of the rate of interest offered by them during the auction.

What are the effects of VRRR?

• One of the most obvious impacts of VRRR is that it curbs the liquidity in the system 
• The move supports the rupee as it reduces the supply of rupee in the system
• It also affects banks as they face short-term liquidity crunch, which may impact their ability to lend.