Main Note - [Liquidity Adjustment Facility (LAF)](Liquidity%20Adjustment%20Facility%20(LAF).md) in Daily Data of [Money Market Operations (MMO)](Money%20Market%20Operations%20(MMO).md) ### VRRR auction 1. In VRRR auction, rates are arranged in ascending order (lowest interest rate first). 2. So allotment is based on multiple price method using rates. 3. Participants - Only scheduled commercial banks (including Regional Rural Banks) and Primary Dealers (PDs) are allowed. They have to maintain 4. **Notified Amount vs. Bid Amount vs. Allotted Amount** - There are three distinct figures that appear in every LAF auction result and are often confused: 1. Notified Amount - what RBI announces it wants to absorb/inject 2. Bid Amount - what banks actually offer (can be more or less than notified, that is, under/oversubscription). If Bid Amount < Notified Amount, the auction is under-subscribed signalling that the banks don't want to park money with RBI at rates acceptable (lower) to RBI and they prefer to hold it with them, and over-subscription signals surplus liquidity chasing the facility. 3. Allotted Amount - what RBI actually accepts (≤ notified amount) 5. Bids at or below the repo rate in variable auction are not accepted, as all may bid at the same repo rate and there will be no price discovery and it will just be a fixed rate auction. 6. **Cut-off Rate** is the the last accepted rate in the bidding queue, beyond which no further bids are accepted. 7. Bid-cover ratio = Total amount bid is considered for bid-cover ratio. So it includes both accepted and rejected bids. The ratio measures the overall demand, and not just the qualifying demand. 8. Weighted Average Rate (%) = $\dfrac {\text{Rate} \times \text{Amount}}{\text{Total Amount}}$ 9. If cut-off = weighted average in a VRRR auction, it means all accepted bids were at exactly the cut-off rate, nothing lower got in. 10. Partial Acceptance Percentage of offers received at cut off rate. 1. If accepting all the offers at the cut off rate exceeds the notified amount, then RBI partially accepts it. 2. Pro-rata allotment percentage applied to all bids submitted at the cut-off rate: $\text{Partial Acceptance Percentage (\%)} = \left( \dfrac{\text{Total Notified Amount} - \text{Amount Allotted up to Previous Rate}}{\text{Total Amount Bid at Partial Rate (by all bidders)}} \right) \times 100$ 3. This is the actual monetary amount a single participant gets at the cut-off rate: $\text{Amount Bid by Bidder at Partial Rate} \times \left( \dfrac{\text{Total Notified Amount} - \text{Amount Allotted up to Previous Rate}}{\text{Total Amount Bid at Partial Rate (by all bidders)}} \right)$ ### VRR auction 1. In VRR auction, rates are arranged in descending order (highest interest rate first). 2. If cut-off = weighted average in a VRRR auction, it means all accepted bids were at exactly the cut-off rate, nothing higher got in. ## LAF Corridor 1. SDF (floor) ≤ VRR/VRRR (variable, market-discovered) ≤ MSF (ceiling). ## LAF 1. [Liquidity Adjustment Facility (LAF)](Liquidity%20Adjustment%20Facility%20(LAF).md) ## Related Notes 1. [Monetary Policy](Monetary%20Policy.md)