Context: Recently, The Reserve Bank of India (RBI) has decided to advance the first of the two variable rate term repo auctions to March 26 from March 30, to address any additional demand for liquidity and to provide flexibility to the banking system in year-end liquidity management.
Current Scenario

• This has been one of the many steps taken by the central bank to tide over a potential liquidity crisis.
• On 6 March, the central bank had announced two variable rate term repo auctions of Rs 25,000 crore each to be conducted on March 30 and March 31 to address any additional demand for liquidity and to provide flexibility to the banking system in year-end liquidity management.
• As a special case, Standalone Primary Dealers (SPDs) were also allowed to participate in these auctions along with other eligible participants.
• The central bank also decided to temporarily enhance liquidity available to SPDs under the its Standing Liquidity Facility (SLF) from Rs 2,800 crore to Rs 10,000 crore with immediate effect in order to facilitate year-end liquidity management by SPDs.
• All other terms and conditions as applicable to term Repo auctions will remain the same. The Reserve Bank is monitoring the evolving financial market conditions. 
• The Reserve Bank will calibrate its operations to meet any need for additional liquidity support, if warranted, to ensure normal functioning of markets, promote staff welfare and preserve financial stability.

About Repo rate

• A repurchase agreement (repo) is a form of short-term borrowing for dealers in government securities.
• In the case of a repo, a dealer sells government securities to investors, usually on an overnight basis, and buys them back the following day at a slightly higher price.
• That small difference in price is the implicit overnight interest rate. Repos are typically used to raise short-term capital.
• They are also a common tool of central bank open market operations.
• For the party selling the security and agreeing to repurchase it in the future, it is a repo; for the party on the other end of the transaction, buying the security and agreeing to sell in the future, it is a reverse repurchase agreement.

Description: In the event of inflation, central banks increase repo rate as this acts as a disincentive for banks to borrow from the central bank. This ultimately reduces the money supply in the economy and thus helps in arresting inflation.
About Reverse Repo rate

• It is a mechanism to absorb the liquidity in the market, thus restricting the borrowing power of investors.
• It is done when the RBI borrows money from banks when there is excess liquidity in the market. The banks benefit out of it by receiving interest for their holdings with the central bank.

Description: During high levels of inflation in the economy, the RBI increases the reverse repo. It encourages the banks to park more funds with the RBI to earn higher returns on excess funds. Banks are left with lesser funds to extend loans and borrowings to consumers.
 
Current Repo Rate and its Impact

• RBI keeps changing the repo rate and the reverse repo rate according to changing macroeconomic factors. Whenever RBI modifies the rates, it impacts all sectors of the economy; albeit in different ways. Some segments gain as a result of the rate hike while others may suffer losses. RBI recently cut down the repo rate by 25 basis points to 5.15% from 5.75%. In the same line, the reverse repo rate was also reduced to 4.9% from 5.5%.

• About Repo Auction: An auction conducted by the central bank of a country (RBI in Indian context) to inject cash into banking system. Central Bank(RBI) lends money to commercial banks. Commercial banks deposit government and listed corporate bonds as collateral.
• About variable Repo rate Auction: The RBI conducts variable rate 14 day term repo auctions on every Tuesday and Friday. At this auction, it decides the repo rate and the amount of disbursement available under this window. In this manner, it is able to keep the call money rates closer to the previously decided repo rate.
• Currently, it also conducts 28 day term repo auctions. As recommended by the Urjit Patel committee, the RBI would seek to introduce longer term variable rate repo auctions as well.
• About Reverse Repo Auction: An auction conducted by the central bank of a country to remove excess cash from the banking system. Here central bank issues sovereign bonds to absorb the excess liquidity. Commercial banks can buy these bonds because they will get some interest on their excess deposits.