RBI drains out Rs 6 lakh crore excess liquidity

The Reserve Bank of India (RBI) sucked out Rs 6 lakh crore in excess liquidity from the banking system through two overnight variable rate reverse repo (VRRR) auctions on Monday, as the banking system remained awash with liquidity following larger-than-expected dollar inflows of $136 billion through the special forex mobilisation scheme launched on June 8.

While the scheme helped the RBI shore up forex reserves and support the balance of payments, which has been in deficit since FY25, it has also resulted in an unprecedented build-up of excess liquidity in the banking system. System liquidity stood at Rs 11.16 lakh crore as of September 6, prompting the central bank to announce liquidity-draining measures through VRRR auctions totalling Rs 12 lakh crore over two days.

VRRR is a tool used by the RBI to temporarily absorb excess liquidity by allowing banks to park their surplus funds with the central bank. The RBI pays interest on these funds, with the rate determined through an auction.

Between August 3 and September 7, the RBI has absorbed a whopping Rs 59.6 lakh crore through 32 VRRR auctions, with tenures ranging from overnight to 14 days. The largest single-day liquidity absorption came on September 7, when the central bank sucked out Rs 6 lakh crore through two overnight auctions.

Monday’s two overnight VRRR auctions came after the RBI failed to get the desired response to a 30-day VRRR auction for Rs 7 lakh crore announced on Friday. The central bank on Monday announced an overnight auction for Rs 7 lakh crore in the first half of the day. However, lenders submitted bids worth only Rs 2.59 lakh crore, according to an RBI statement.

The RBI accepted the bids for the 30-day VRRR at a cut-off and weighted average rate of 5.24%.

Soon after, the RBI announced another overnight VRRR auction with a notified amount of Rs 5 lakh crore, which was completed by 11.30 am. Market response to the second auction was somewhat better, with lenders submitting bids worth Rs 3.53 lakh crore, or around 70% of the notified amount, indicating a preference among banks for parking surplus funds for shorter tenures.

The RBI accepted the entire amount in the second auction at a cut-off and weighted average rate of 5.24%.

The special forex mobilisation measures launched by the RBI on June 8 had mobilised $136.38 billion as of August 31. Of this, $127.23 billion came through FCNR(B) deposits, $5.26 billion through overseas foreign currency borrowings (OFCBs), and $3.89 billion through external commercial borrowings (ECBs).