The RBI has stepped up liquidity absorption as a surge in foreign-currency inflows pushes surplus funds in the banking system above ₹10 lakh crore. Overnight money-market rates have consequently remained below the policy repo rate.
Highlights
- RBI absorbed ₹6.02 lakh crore through two three-day Variable Rate Reverse Repo (VRRR) auctions on September 4.
- Banking-system liquidity surplus reached a record ₹10.3 lakh crore as of September 3.
- The two VRRR auctions had a combined notified amount of ₹8.5 lakh crore.
Sto
The Reserve Bank of India has intensified efforts to remove excess money from the banking system, absorbing ₹6.02 lakh crore through two variable rate reverse repo auctions as surplus liquidity climbed to an all-time high.
On September 4, the central bank conducted two three-day VRRR auctions with notified amounts of ₹7 lakh crore and ₹1.5 lakh crore. Banks offered around ₹5.42 lakh crore in the first auction and ₹60,419 crore in the second. Both auctions were conducted at a cut-off rate of 5.24%. Together, the RBI absorbed ₹6,02,394 crore.
The aggressive liquidity management comes after banking-system surplus reached approximately ₹10.3 lakh crore as of September 3, setting a record for the second consecutive day. Average surplus liquidity during the past week stood at ₹7.05 lakh crore, compared with ₹3.67 lakh crore in August and ₹1.07 lakh crore in July.
A major reason for the sharp increase has been the large foreign-currency inflows mobilised under the RBI’s special measures. Banks attracted $136.38 billion by August 31, of which $127.23 billion came through FCNR(B) deposits. The subsequent swaps with the central bank injected significant rupee liquidity into the banking system.
The abundance of funds has also pushed overnight borrowing rates below the RBI’s policy rate. The weighted average call rate was around 4.94% on September 4, compared with the repo rate of 5.25%. This gap has increased pressure on the RBI to absorb surplus liquidity and keep short-term rates aligned with its monetary-policy stance.
The RBI is now moving toward longer-duration liquidity absorption as well. It has announced a 30-day VRRR auction of ₹7 lakh crore for September 7, with an early-redemption facility intended to encourage banks to participate despite their reluctance to lock up funds for longer periods.
Market participants expect surplus liquidity to remain elevated in the near term, making liquidity management an important challenge for the central bank.
