RBI Absorbs Net Liquidity of Rs 7.38 Lakh Crore as Banking System Cash Glut Persists

The Reserve Bank of India (RBI) recorded a net liquidity absorption of Rs 7,37,512.89 crore (approximately Rs 7.38 lakh crore) through its money market operations on September 16, according to data released by the central bank. The substantial liquidity drain highlights the central bank's ongoing battle to mop up excess cash from the domestic financial system and maintain orderly conditions in short-term interest rate markets.

According to the money market operations release, scheduled commercial banks held cash balances of Rs 8,16,490.88 crore with the central bank, while the country's durable liquidity surplus stood at Rs 10,66,303 crore as of August 31.

Surge in Banking Liquidity

The banking system has remained awash with surplus funds, with systemic liquidity hovering between Rs 9 lakh crore and Rs 10.5 lakh crore over recent weeks. The liquidity overhang was primarily spurred by large inflows under the central bank's foreign-currency deposit swap schemes, including Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits, which injected substantial rupee liquidity after dollars were swapped with the RBI. Routine government spending, including salary and pension disbursements, further added to the cash pile held by lenders.

When left unsterilized, such a massive cash surplus threatens to depress overnight borrowing costs below the floor of the RBI’s monetary policy corridor, loosening monetary conditions at a time when global commodity price fluctuations keep inflation risks alive.

Active Liquidity Management

To sterilize the excess balances, the RBI conducted overnight Variable Rate Reverse Repo (VRRR) auctions on September 16.

Key Highlights of the September 16 Operations:

• Primary VRRR Auction: The RBI accepted bids worth Rs 2,50,025 crore against a notified target of Rs 2.50 lakh crore at a cut-off and weighted average rate of 5.24%. The operation had drawn robust demand with total bids tendered at Rs 3,17,088 crore.
• Secondary VRRR Auction: A second auction with a notified amount of Rs 1 lakh crore saw a comparatively subdued response, receiving and accepting bids worth Rs 40,302 crore.
• Standing Facilities: Banks continued to park residual funds across the central bank's overnight Standing Deposit Facility (SDF) and other absorption windows, taking total net absorption across operations to Rs 7.38 lakh crore.

Beyond daily variable reverse repo operations, the central bank announced outright Open Market Operation (OMO) sales of government securities totaling Rs 1 lakh crore scheduled across three tranches. The first tranche of Rs 50,000 crore is scheduled for September 17, with subsequent tranches of Rs 25,000 crore each on September 21 and September 28, providing durable liquidity withdrawal.

Market Implications

For Indian debt markets, the central bank’s assertive interventions serve as an anchor for short-term money market rates. The Weighted Average Call Rate (WACR), along with triparty repo and market repo rates, had experienced intermittent downward pressure due to the heavy supply of funds.

By mopping up excess cash through VRRR operations and preparing secondary market debt sales, the RBI ensures money market rates trade tightly around the policy repo rate. For debt mutual fund investors and corporate treasuries, this prevents short-term yields on Treasury bills, commercial papers, and certificates of deposit from collapsing, ensuring realistic risk pricing across the short end of the Indian yield curve.

Tags: Reserve Bank of India Indian Banking System Money Markets Liquidity Adjustment Facility Government Securities