The Reserve Bank of India successfully absorbed ₹6.02 trillion of surplus liquidity through two variable rate reverse repo (VRRR) auctions on Friday, as the banking system remains flooded with funds following large inflows from the special FCNR(B) deposit scheme. The central bank received and accepted bids worth ₹5.42 lakh crore in a three-day VRRR auction against the notified amount of ₹7 lakh crore, with the auction conducted at a cut-off rate of 5.24%. In another three-day VRRR auction against a notified amount of ₹1.5 lakh crore, banks parked ₹60,420 crore with the RBI at the same 5.24% rate. According to The Hindu BusinessLine, the RBI has stepped up liquidity absorption operations as the banking system has been flooded with funds following large inflows through the special FCNR(B) deposit scheme.
The Reserve Bank of India has decided to conduct a 30-day variable rate reverse repo (VRRR) auction on September 7 to suck out ₹7 lakh crore surplus liquidity from the banking system. The auction will take place between 9.30 am and 10.00 am on September 7, 2026, with the reversal of these funds scheduled for October 7. As per the RBI notification, this decision comes after a review of the current and evolving liquidity conditions, with the excess liquidity in the banking system estimated to be in surplus of around ₹10.32 lakh crore as on September 3. The central bank has also provided participants with the option of premature reversal of the amount lent, including partial reversal, with requests to be placed through the E-Kuber portal during 0900-1700 hours on working days in Mumbai. The longer tenor marks a shift from recent operations of up to 15 days and will allow the RBI to keep excess cash out of the banking system for an extended period.
The surge in liquidity has pushed overnight money market rates to concerning levels, with the overnight weighted average call rate (WACR) falling below the standing deposit facility (SDF) rate to settle at 4.94% against the previous close of 4.95%. The SDF rate, which currently stands at 5%, is the interest rate at which banks park their surplus funds with the RBI without providing collateral. According to Business Standard, a money market dealer at a state-owned bank expects the liquidity to go further up toward ₹12 trillion, with the WACR slipping further lower toward 4.85%. This represents a significant concern as the current levels are below the RBI's policy corridor, with experts warning that the liquidity surge may lead to a rise in inflation. The weighted average call rate — the overnight rate at which banks lend to each other and a key gauge for the RBI — has slipped below the central bank's policy rate as surplus cash drives down borrowing costs.
India's banking system liquidity surplus has reached its highest point in over four years at ₹10.32 lakh crore as of September 3, up from ₹6.7 lakh crore at the end of August, according to latest central bank data. This surge is attributed to record forex-inflow programs and the successful garnering of $136.38 billion in dedicated forex-inflow programs through the FCNR(B) scheme, including $127.23 billion through FCNR(B) deposits, $5.26 billion through OFCBs and $3.89 billion via ECBs. According to Mint, India's banking system is awash with a record ₹10.5 trillion of excess cash after the central bank exchanged dollars raised by banks from overseas Indians for rupees. The RBI's program to attract foreign-currency deposits from the diaspora garnered a record-breaking $127 billion, prompting it to close the window a month ahead of schedule in August. Before the swap scheme, average system and durable liquidity in May 2026 stood at ₹1.6 trillion (0.6% of NDTL) and ₹3.8 trillion (1.4% of NDTL) respectively, but average system liquidity has since increased to ₹3.7 trillion (1.3% of NDTL) in August. As reported by Business Standard, experts anticipate this surplus will moderate by the third quarter of FY27 due to seasonal factors, with economists noting that the liquidity surplus is substantially above the RBI's preferred level of around ₹2.7 lakh crore.
The large inflows have also strengthened India's external buffers significantly. Foreign currency assets rose by USD 47.9 billion, taking forex reserves to a record USD 729.3 billion, according to latest data. According to NDTV Profit, HSBC's Pranjul Bhandari expects foreign exchange reserves to reach just short of $800 billion by mid-September due to the continued inflows. However, economists caution that the increase cannot be attributed one-for-one to the RBI's swap operations because of other dollar inflows and possible reserve intervention. Barclays has consequently raised its FY27 balance-of-payments surplus forecast to USD 100 billion from USD 50 billion earlier, citing stronger-than-expected FCNR inflows and a lower projected current account deficit. Some of the surplus is expected to drain naturally through higher currency demand during the festive season, possible forex intervention and forward maturities.
The Reserve Bank of India has conducted 32 VRRR auctions between August and so far in September, with maturities ranging from overnight to 14 days, to manage the excess liquidity. According to The Hindu BusinessLine, the RBI has already stepped up VRRR auctions, announcing operations cumulatively worth ₹53.5 lakh crore between August 6 and September 2. The central bank conducted overnight VRRR operations of ₹5 lakh crore on Wednesday getting bids for ₹4.6 lakh crore, while Tuesday's VRRR auction of 7 days garnered ₹1.17 lakh crore against a notified amount of ₹6 lakh crore. As reported by Business Standard, the central bank conducted two 3-day Variable Rate Reserve Repo (VRRR) auction on Friday worth ₹8.5 trillion, with banks parking ₹6.02 trillion against the notified amount at a weighted average rate of 5.24%. Economists suggest the central bank will have to deploy additional tools to absorb surplus liquidity, with options including temporary CRR measures, OMO (open market operations)/MSS (market stabilisation scheme) operations, forex sell-buy swaps, cash management bills and shorter-tenor VRRRs. The higher surplus liquidity in the banking system has pulled down the short-term money market rates, with current weighted average call money rates trading at 4.93%, which is 0.32% below the policy rate.
HSBC's Pranjul Bhandari has identified two primary routes for the RBI's liquidity drain strategy. The first involves spot intervention, selling dollars to support the rupee, which by her estimate could remove close to ₹3 lakh crore over the next three months. As she explained to NDTV Profit, "For every $10 billion dollars that the RBI intervenes, it sucks out ₹1 lakh crore." The second option is an incremental hike in the cash reserve ratio (CRR) of roughly 1% of GDP, which could absorb another ₹3 lakh crore. "Between these two, you can take out ₹6 lakh crore from the market," Bhandari calculated. She noted that the RBI has "shown the intent that it wants to spend these dollars to stabilise the currency or even strengthen it," giving the central bank room to manage both rupee stability and liquidity overhang simultaneously. Looking beyond the near-term measures, Bhandari warned against reading too much into the FCNR(B) windfall, calling it a one-off rather than a durable source of dollar inflows, emphasizing the need for more sustainable sources like exports through pending trade agreements. According to ICICI Bank, a repo rate increase of 50-75 basis points (depending upon inflation) should drive real rates into neutral territory, with the current real policy rate of 0.8% lower than the neutral rate band of 1.4-1.9%.
