The Reserve Bank of India (RBI) has absorbed over Rs 6.02 lakh crore from the banking system through two variable rate reverse repo (VRRR) auctions as surplus liquidity remained at a record high. The central bank received and accepted bids worth Rs 5,41,975 crore in a three-day VRRR auction against the notified amount of Rs 7 lakh crore. The auction was conducted at a cut-off rate of 5.24%. In another three-day VRRR auction, against a notified amount of Rs 1.5 lakh crore, banks parked Rs 60,419 crore with the RBI, also at 5.24%. Together, the two operations helped the RBI absorb Rs 6,02,394 crore of surplus liquidity.
The RBI has stepped up its liquidity absorption operations as the banking system has been flooded with funds following large inflows through the special FCNR(B) deposit scheme. According to RBI data, liquidity in the banking system is currently estimated to be in surplus of around Rs 10.32 lakh crore as of September 3. The data also showed that the RBI’s special forex measures had mobilised $136.38 billion as of August 31, including $127.23 billion through FCNR(B) deposits, $5.26 billion through OFCBs (Overseas Foreign Currency Borrowings) and $3.89 billion via ECBs (External Commercial Borrowings).
The FCNR(B) window was closed a month early on August 31 due to the strong response, while the ECB/OFCB facility remains open until December 31, and inflows through these routes are expected to pick up. The mobilisation brought foreign currency into the banking system, while the subsequent swaps with the RBI provided rupee liquidity to banks. Besides FCNR(B) inflows, month-end government expenditure, including payments towards salaries and pensions, also added to liquidity in the banking system.
The higher surplus liquidity in the banking system has pulled down short-term money market rates over the past few weeks. Currently, weighted average call money rates are trading at 4.93%, which is 0.32% below the policy rate. To align money market rates with the repo rate, the central bank conducted 32 VRRR auctions between August and so far in September, with maturities ranging from overnight to 14 days.
