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![]() Impact on the yield curve was more measured as the VRRR increased the overall cost of liquidity gradually. The interest burden was borne by the RBI, and the use of the instrument by banks was discretionary. The rate for this was close to the repo rate against lower levels of reverse repo rate - where the bulk of parking was done. With this tool, banks had flexibility to park their excess liquidity for an amount they were comfortable with, for a short tenor (up to 28 days, but mostly for 14 days). Thus, RBI used an unconventional tool – variable rate reverse repos (VRRRs). This may not be desirable as the economy is still recovering from the pandemic. Using the same instrument this time would have meant a significant amount of MSS issuance, leading to an increased interest burden on the government (since MSS coupon liability is part of the GoI budget), and a higher yield curve. This overhang was even higher than post-demonetisation levels in 2016.Īt that time, RBI resorted to issuing T-Bills under Market Stabilisation Scheme (MSS) to absorb the excess liquidity. Since RBI expressed its intent in 2021 to roll back its emergency liquidity, it has contended with one significant issue the extent of liquidity overhang was just too high.
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