In an unexpected move, the Reserve Bank of India (RBI) announced a 14-day Variable Rate Reverse Repo (VRRR) auction to withdraw Rs 25,000 crore of liquidity from the banking system. This decision comes as the banking sector grappled with a liquidity deficit earlier this week, driven by hefty Goods and Services Tax (GST) payments and significant forex outflows.
The banking system’s liquidity deficit of Rs 9,489 crore marked the first such occurrence in two months. The contributing factors include:
The Variable Rate Reverse Repo (VRRR) is a monetary tool used by the RBI to manage liquidity. Banks park their surplus funds with the central bank for a specific period, receiving interest at a variable rate determined through an auction process.
The RBI’s decision to further suck out liquidity serves a dual purpose:
The rupee has faced significant headwinds, becoming Asia’s second-worst-performing currency due to multiple factors:
While the VRRR move aims to support the rupee, it reflects broader economic concerns:
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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.
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