VRRR Auction: RBI’s Liquidity Tool
Why is RBI in the news?
Recently, to tackle the weakening rupee and keep money markets stable, the RBI took a strategic step: it raised over USD 143.5 billion through its special forex swap facility. The operation was conducted to absorb surplus liquidity from the system and align overnight money market rates with the benchmark policy repo rate.
This brought a huge amount of cash into the banking system, creating a surplus of Rs 4.92 lakh crore, so the RBI simultaneously used absorption tools to soak up this extra liquidity and maintain balance.
Special Forex Swap Facility:
Launched by RBI in June 2026, this facility allows commercial banks to swap their foreign currency inflows, like FCNR(B) deposits and External Commercial Borrowings (ECBs), with RBI for rupees, while protecting them from exchange rate risk.
Its aim is to attract more US dollar inflows, improve dollar liquidity in the forex market, and help control the depreciation of the rupee.
Composition of Forex Inflows: Out of the USD 143.5 billion received by September 2026, most of it came from FCNR(B) deposits (USD 132 billion), and the rest from Overseas Foreign Currency Borrowings (OFCBs) and External Commercial Borrowings (ECBs).
Variable Rate Reverse Repo (VRRR) Auction: To manage the huge cash flow, RBI conducted an overnight VRRR auction and absorbed Rs 71,971 crore from the banking system. VRRR is a monetary policy tool used by RBI under its Liquidity Adjustment Facility (LAF).
Its main aim is to absorb excess funds from banks for a short period so that overnight money market rates stay aligned with the benchmark repo rate. Unlike fixed-rate reverse repo, the interest rate in VRRR is decided through competitive bidding by commercial banks.
Open Market Operations (OMO): Along with VRRR, RBI is also using OMOs to permanently drain rupee liquidity by selling government securities.
About FCNR(B)
Account FCNR(B) is a type of fixed deposit account that NRIs and Persons of Indian Origin (PIOs) can open in India.
Key features:
In Foreign Currency: Unlike NRE and NRO accounts, which are kept in Indian rupees, FCNR(B) accounts are maintained in freely convertible foreign currencies like USD, GBP, EUR, JPY, etc.
No Exchange Rate Risk: Since the money is kept in foreign currency, the depositor does not face the risk of rupee depreciation.
Fully Repatriable & Tax-Free: Both the principal and interest can be taken back to their country of residence. Also, the interest earned is fully exempt from income tax in India.
Role of Forex Reserves in Defending the Rupee
Forex reserves act as a crucial buffer for RBI against sharp rupee volatility and external shocks. When the rupee depreciates, RBI can sell dollars from its reserves to increase dollar supply in the market and ease pressure on the rupee. Strong reserves also boost investor confidence, help meet external payment obligations, cushion capital outflows, and strengthen overall economic stability.
However, despite record forex reserves, the rupee remained under pressure due to continuous FPI outflows, high demand for dollars, high global interest rates, and rising crude oil prices. The West Asia conflict made it worse by disrupting energy supplies and pushing oil prices higher. Since India depends heavily on imported crude, costlier oil increased the import bill and demand for dollars, which further weakened the rupee and added to inflation.
What are Foreign Exchange (Forex) Reserves?
Forex reserves are assets held by a central bank in foreign currencies. They act as a financial shock absorber and ensure that a country can meet its external obligations.
Key Components of India's Forex Reserves:
1. Foreign Currency Assets (FCA): The largest part, consisting of currencies like the US dollar, euro, pound, and yen, mostly invested in foreign government bonds.
2. Gold Reserves: Held physically and digitally by RBI as a safe-haven asset.
3. Special Drawing Rights (SDRs): Also called 'Paper Gold', it is an international reserve asset created by the IMF to supplement member countries' official reserves.
4. Reserve Tranche Position (RTP): The difference between a member's quota and IMF's holdings of its currency, which a country can access without conditions. India's RTP is around USD 4.78 billion (as of early 2025).
Management: RBI is the custodian and manager of India's forex reserves under the RBI Act, 1934, and FEMA, 1999. It invests these reserves based on three principles in this order, such as safety, liquidity, and return, usually in top-tier global sovereign bonds or with other central banks.
Significance:
- Import Cover: Provides foreign currency to pay for essential imports like crude oil, electronics, and gold, even during global shocks.
- Exchange Rate Management: The RBI uses reserves to intervene in the forex market. If the rupee falls sharply, the RBI sells dollars to stabilize it.
- Investor Confidence: High reserves show strong economic health and reassure foreign investors that India can manage external shocks and debt.
- External Debt Servicing: Ensures government and companies can repay their foreign currency debts on time.
Conclusion
In short, RBI's special forex swap facility was a timely move to bring in dollars and support the rupee, while tools like VRRR and OMO helped manage the resulting cash surplus in the banking system. Forex reserves act as India's financial safety net, helping to pay for imports, repay foreign debt, stabilize the rupee, and build investor confidence. And instruments like FCNR(B) play a key role in attracting those dollars without putting exchange rate risk on NRI depositors. Together, these measures show how RBI balances external stability with domestic liquidity management to maintain overall economic stability.
