Unpacking Variable Rate Reverse Repo: A Key Financial Tool

What is VRRR in Simple Words?

VRRR stands for Variable Rate Reverse Repo. It is a method used by the Reserve Bank of India (RBI) to absorb excess money from banks for a short period. RBI takes money from banks and offers them interest in return. The term variable rate means the interest rate is not fixed—it is decided through an auction.

Why Does RBI Do This?

If too much money is floating in the economy, it can lead to inflation or unstable interest rates. To reduce that surplus money, RBI tells banks: “Give us your extra cash for a few days. We’ll give it back with interest.” This helps control inflation and keeps short-term interest rates stable.

How Does VRRR Work?

• RBI announces it will take money from banks for, say, 7 days.
• Banks bid to deposit their money and earn interest.
• RBI accepts the bids offering the best (lowest) interest rates.

For example: Let’s say 3 banks want to participate.

• Bank A offers to deposit ₹500 crore at 6% interest.
• Bank B offers ₹700 crore at 5.9%.
• Bank C offers ₹800 crore at 5.85%.

RBI will accept the lowest-cost money first and keep going till the required amount is met.

What is the Difference Between Fixed Rate and Variable Rate Reverse Repo?

• In fixed rate, the interest rate is set in advance by RBI.
• In variable rate, banks compete by offering to lend at the best interest rate they can.

How is This Different from Normal Repo?

• In Repo, banks borrow money from RBI when they have less money.
• In Reverse Repo/VRRR, banks give money to RBI when they have extra funds.

When is VRRR Used?

RBI uses VRRR when banks are flooded with extra cash—for example, after the government spends a lot or during heavy bond inflows.

Benefits for Banks and the Economy

• Banks earn safe interest on idle cash.
• RBI prevents too much money chasing too few goods, which helps control inflation.
• Keeps short-term interest rates around the targeted repo rate.