RBI Absorbs Rs 2.23 Lakh Crore via VRRR Auction as Banking Liquidity Surplus Persists

The Reserve Bank of India (RBI) absorbed Rs 2.23 lakh crore from the banking system on Friday through a Variable Rate Reverse Repo (VRRR) auction. The operation is part of the central bank's continued efforts to mop up persistent surplus cash and align overnight money market rates with the benchmark policy repo rate.

According to the central bank, bids worth Rs 2,22,629 crore were received against a notified amount of Rs 2.25 lakh crore. The RBI accepted the entire bid volume at a weighted average rate of 5.24%.

Persistent Systemic Surplus

The banking system has been awash in liquidity over recent weeks, driven primarily by heavy inflows through Foreign Currency Non-Resident (Bank) [FCNR(B)] deposits, subsequent dollar-rupee swap operations conducted by the central bank, and routine month-end government expenditures such as salaries and pensions.

Data released by the RBI showed that liquidity in the banking system was estimated to be in a surplus of around Rs 6.94 lakh crore as of September 17. Although substantial, the figure reflects a moderation from earlier in the month, when banking system surplus liquidity stood near Rs 10.73 lakh crore as of September 11.

Multi-Pronged Absorption Strategy

The VRRR auction is one component of the central bank's broader liquidity management framework. Alongside temporary repo operations, the RBI has deployed Open Market Operations (OMO) to permanently withdraw durable liquidity.

The central bank recently announced an OMO bond sale program targeting Rs 1 lakh crore across three tranches:

• The first tranche of Rs 50,000 crore was concluded on Thursday via the sale of government securities.
• The second tranche of Rs 25,000 crore is scheduled for September 21.
• The final tranche of Rs 25,000 crore is slated for auction on September 28.

Earlier in the week, the central bank had absorbed Rs 3.93 lakh crore through a VRRR auction against a notified amount of Rs 5 lakh crore, also accepted at a cut-off and weighted average rate of 5.24%.

Market and Banking Impact

Excess liquidity in the interbank market poses challenges for monetary policy transmission because it tends to drag overnight rates, including the weighted average call rate (WACR) and collateralised borrowing rates, well below the operating policy target. By stepping up reverse repo operations and bond sales, the RBI ensures that short-term rates remain anchored.

For Indian commercial banks, comfortable liquidity conditions have reduced their dependence on short-term wholesale funding. Outstanding certificates of deposit (CDs) dropped to Rs 6.36 lakh crore from Rs 6.90 lakh crore during the fortnight ended August 31, with fresh CD issuances slowing markedly.

For retail and institutional fixed-income investors, the ongoing mop-up signals that while short-term money market yields will remain supported near the policy rate, the central bank is actively preventing financial conditions from easing prematurely. Debt market participants will continue to track subsequent OMO auction cut-offs and VRRR absorption levels to gauge the trajectory of short-term yields and credit growth heading into the fiscal half-year close.

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