RBI Absorbs ₹2.4 Lakh Cr Through VRRR Amid ₹7.38 Lakh Crore Liquidity Surplus

The Reserve Bank of India absorbed ₹2.40 lakh crore through variable rate reverse repo auctions from the banking sector on Thursday amid a large liquidity surplus. The central bank received bids worth ₹2,39,959 crore, which it accepted fully at a cut-off and weighted average rate of 5.24%.

Why Liquidity in the Banking System Is So High

The banking system surplus stands at approximately ₹7.38 lakh crore as of September 16. Two factors drove the build-up:

• Heavy mobilisation of FCNR(B) deposits by banks brought foreign currency into the system, and subsequent swaps with the RBI provided rupee liquidity to banks
• Month-end government expenditure, including payments toward salaries and pensions, added further liquidity

What the RBI Is Doing to Absorb the Surplus

The RBI has been conducting multiple VRRR auctions since last month to absorb excess liquidity from the banking system and align overnight money market rates with the repo rate. Thursday’s auction is part of that ongoing effort.

Beyond VRRR, the central bank also announced Open Market Operation sales of government securities for a notified amount of ₹1 lakh crore in three tranches last week. The schedule for these OMO sales is as follows:

What Is VRRR and How Does It Work?

A variable rate reverse repo is a tool through which the RBI absorbs surplus funds from banks for a fixed period at a market-determined rate. Banks park their excess cash with the RBI and earn interest on it. By conducting these auctions, the central bank reduces the amount of free liquidity in the system and brings short-term market rates closer to the policy repo rate.

Final Outlook

Source: Moneycontrol