The Reserve Bank of India has announced a Variable Rate Reverse Repo (VRRR) auction for ₹2 lakh crore on April 17, 2026, to manage the banking system's surplus liquidity. According to The Hindu BusinessLine, the central bank received offers to deploy funds aggregating ₹2,28,098 crore against the notified amount at last Friday's auction, accepting offers worth ₹2,00,031 crore at a cut-off rate of 5.24 per cent and weighted average rate of 5.23 per cent. As of April 17, 2026, current liquidity in the banking system is estimated to be in surplus of around ₹4.09 lakh crore, prompting the RBI to conduct this liquidity absorption measure.
The Reserve Bank of India has released a comprehensive study titled 'Optimal Level of Liquidity' that reveals critical insights into maintaining monetary policy effectiveness. According to the study reported by The Hindu BusinessLine, keeping the weighted average call rate (WACR) aligned to the repo rate requires different liquidity levels in deficit and surplus conditions. The extent of alignment is contingent on the level of liquidity surplus or deficit in the banking system.
The effect of surplus liquidity is evident in current market conditions, with overnight weighted average call rates being dealt at 5.08-5.09 per cent levels, which are below the policy repo rate of 5.25 per cent. As reported by The Hindu BusinessLine, the RBI endeavours to anchor the operating target – the WACR – to the policy repo rate to ensure that its monetary policy framework remains effective. RBI Governor Sanjay Malhotra has emphasized that the central bank will continue to be proactive and pre-emptive in liquidity management to ensure sufficient liquidity in the banking system to meet productive economic requirements.
The RBI study indicates that surplus liquidity in the range of 0.6 to 1.1 per cent of NDTL is likely to keep the WACR between 5 to 10 basis points below the repo rate. In absolute terms, this translates to surplus liquidity in the ₹1,53,242 crore to ₹2,80,943 crore range, based on the NDTL of all scheduled banks as on March 30, 2026. This will maintain the WACR between 5.20-5.15 per cent, as reported by The Hindu BusinessLine.
The guiding principle of RBI's liquidity management is to align WACR with the policy repo rate, as noted in the study. Liquidity mismatches could lead to deviation of the operating target from the policy rate, hampering monetary policy transmission. RBI officials emphasized that excessive liquidity surplus over a prolonged period runs the risk of driving short-term interest rates to ultra-low levels, distorting risk perceptions and engendering asset price bubbles. Large deficit in banking system liquidity raises borrowing costs for banks, which constricts lending capacity and impedes monetary transmission. The current policy environment reflects this cautious approach, with central banks being cautious of overtightening amid geopolitical uncertainty unless upside inflation risks far out-weigh growth risks.
