RBI ran a 3-day VRRR auction and a 34,000 crore underwriting auction on the same day
Victoria Shinder2 min readThe Reserve Bank of India's press release page for 25 September carries the two operations side by side. The Bank announced, and then published the result of, a 3-day Variable Rate Reverse Repo auction under the Liquidity Adjustment Facility; on the same day it published the result of an underwriting auction for the sale of a government security of 34,000 crore rupees. The previous day's overnight VRRR result sits directly above them, and a Reserve Money release for the fortnight ended 15 September is on the same page.
What it means
A variable rate reverse repo is the Bank taking cash out of the banking system for a defined term, at a rate the auction discovers rather than one the Bank sets. Running it over three days rather than overnight says something specific: the surplus being absorbed is not a single day's accident of flows but a level the Bank expects to persist across the weekend, and it would rather establish a term price for it than roll the operation every morning.
Setting that beside an underwriting auction for a 34,000 crore bond sale is the part worth pausing on, because the two face opposite directions. An underwriting arrangement exists so that a government security auction clears even if bids fall short — the primary dealers take the residual, for a fee. So the same institution is, on the same day, withdrawing surplus liquidity at the short end and standing behind the absorption of duration at the long end.
That is not a contradiction, and reading it as one is the common mistake. It is what liquidity management looks like when the system is carrying cash while the curve still needs someone to underwrite its far end. Neither release says much alone; the pair is a better description of conditions than either, and the fortnightly Reserve Money figure on the same page is the number that tells you whether the absorption is keeping up.