The Reserve Bank of India (RBI) began adjusting its liquidity management in February, 2020. How does the RBI utilises the reverse repo rate or variable reverse repo rate auction as its primary liquidity management operat

The rebalancing of liquidity management by the Reserve Bank of India (RBI) began in February 2020, when the central bank changed its liquidity absorption mechanism from the fixed-rate overnight reverse repo window to longer duration variable rate reverse repo (VRRR) auctions. To absorb extra system liquidity, the RBI has announced the implementation of a VRRR programme, which has higher yield prospects than overnight reverse repo at a fixed rate. The Reserve Bank of India (RBI) has increased the number of VRRR auctions as it transitions away from the overnight reverse repo auction with a fixed interest rate and re-establishes VRRR as its primary liquidity management operation. Accrual returns on very short-term, low-market-risk products such as overnight and liquid funds may increase as a result of the substantial withdrawal of liquidity from the system, according to market participants. The reverse repo rate is the interest rate at which the Reserve Bank of India borrows funds from commercial banks. Since the Reserve Bank of India is considered the lender of last resort and has minimal need for funds from other sources, the VRRR appears to be a method to absorb surplus liquidity from the market, which in turn helps to control inflation in the country. Moreover, through VRRR auctions, the RBI absorbs the market's excess liquidity. The RBI conducts 1-day, 3-day, 14-day, and 28-day auctions, in which banks participate. RBI chooses the bank that accepts the lowest VRRR quote for a certain amount of money to store its reserves. The bank that quotes the lowest rate of interest above the Reverse Repo Rate is deemed to have won the VRRR auction. As it earns a greater return than the Reverse Repo Rate, it is a good place for banks to store their money, and the RBI would be able to control the money supply and reduce the inflation risk in the economy.