The banking system's surplus liquidity has surged to ₹6.65 trillion on Monday, marking the highest level since April 19, 2022, according to the latest data from the Reserve Bank of India. This represents a significant escalation from the previous ₹5 lakh crore surplus recorded by August 30, marking the highest level in over four months since April 15, 2026. The surge was driven by strong inflows mobilised through the FCNR(B) swap scheme, with banks having raised $65.4 billion through FCNR(B) deposits alone by August 21, as reported by Business Standard. The increasing pace of FCNR(B) deposit inflows, coupled with month-end government spending, has further augmented liquidity, creating the current comfortable surplus position. According to a treasury head at a state-owned bank, "We expect the total mobilization to have touched $100 billion because the mobilization was huge during the last fortnight." The mobilisation brought foreign currency into the banking system, while subsequent swaps with the RBI provided rupee liquidity to banks. As per The Economic Times, the daily average system liquidity stood at ₹3.67 lakh crore in August, versus ₹1.07 lakh crore, reflecting the dramatic surge in excess liquidity.
The Reserve Bank of India's variable rate reverse repo (VRRR) auctions saw tepid demand on Monday, with banks parking only ₹3.74 trillion against the notified amount of ₹10 trillion, representing less than 50% participation. According to The Hindu BusinessLine, the first VRRR auction of seven days duration to drain out ₹6 lakh crore saw a relatively muted response, with banks parking ₹1,14,320 crore at weighted average rate (WAR) of 5.24 per cent. However, the second VRRR auction (overnight) to suck out ₹4 lakh crore saw a better response, with banks parking ₹2,59,846 crore at a WAR of 5.24 per cent. Both auctions were conducted at a cut-off and weighted average rate of 5.24 per cent. The central bank has been conducting these VRRR auctions to absorb the surplus liquidity that has built up in the banking system, with the recent surge largely driven by strong inflows mobilised through the FCNR(B) swap scheme. However, as noted by market participants, demand remained subdued as liquidity in the banking system is unevenly distributed, with surplus funds concentrated with a few banks, leading to skewed liquidity among institutions. As per The Economic Times, on Tuesday RBI conducted a 7-day VRRR for ₹6 lakh crore, which got bids for ₹1.14 lakh crore, while the overnight operation of ₹4 lakh crore on Tuesday got bids of ₹2.6 lakh crore. On August 31, a 15-day VRRR of ₹6 lakh crore attracted bids of ₹1.34 lakh crore, with the RBI planning to conduct an overnight VRRR ₹5 lakh crore on Wednesday.
The surge in excess liquidity has pushed the weighted average call rate (WACR) significantly below the repo rate, to 4.98%, according to The Economic Times. The WACR for August stood at 5.10%, while for July the WACR was at 5.23%, reflecting the dramatic impact of the FCNR(B) inflows on money market conditions. The central bank has been conducting these VRRR auctions to absorb the surplus liquidity that has built up in the banking system, with the recent surge largely driven by strong inflows mobilised through the FCNR(B) swap scheme. However, as noted by market participants, demand remained subdued as liquidity in the banking system is unevenly distributed, with surplus funds concentrated with a few banks, leading to skewed liquidity among institutions. The comfortable liquidity position has supported lending conditions and is expected to provide further support to credit growth. The central bank plans to conduct additional overnight VRRR auction on Wednesday worth ₹5 trillion to continue absorbing surplus funds.
The benchmark 10-year government bond yield rose to 6.95% on Monday, the highest since June 8, 2026, against the previous close of 6.91%, tracking the rise in crude oil prices and geopolitical developments. According to Business Standard, government bond yields hardened due to crude oil moving above $90 per barrel and hawkish comments from the US Federal Reserve Chair Warsh at the Jackson Hole symposium, where inflation was emphasised as the Fed's primary objective. Market participants said yields are unlikely to see an immediate correction and would remain elevated unless the RBI intervenes in the fixed-income market, with demand for government securities expected to improve once yields reach more attractive levels around 7.2%-7.4% in the 10-year segment. The central bank has announced a buyback of four government securities with an aggregate face value of ₹30,000 crore through an auction scheduled for Thursday, September 3, 2026, designed to alleviate the impending redemption pressure as over ₹6 lakh crore in securities are approaching maturity in fiscal year 2027.
The rupee appreciated to a two-month high, settling at 94.95 per dollar against the previous close of 95.17 per dollar, extending gains for a third straight session and outperforming Asian currencies. According to Business Standard, the local currency extended its gains for a third straight session, outperforming Asian peers as strong domestic growth data and dollar supplies from the Reserve Bank of India supported the currency. The rupee's resilience comes despite the RBI's efforts to drain excess liquidity through VRRR auctions, with the central bank planning to conduct another ₹1 trillion VRRR auction with a seven-day tenor on Tuesday to continue absorbing surplus funds. The weighted average call rate (WACR) — which is the operating target of monetary policy — settled at 5.16 per cent, against the previous close of 5.18 per cent. As reported by HDFC Securities, "The Indian rupee is on a winning streak, locking in its third straight day of gains and outperforming its Asian peers, thanks to a stellar domestic growth numbers even after geopolitical tension simmering, and the central bank stepping in with dollar supplies." The rupee's strength comes despite the RBI's liquidity absorption operations, with the central bank providing dollar supplies to support the currency amid persistent geopolitical tensions.
This comprehensive liquidity management strategy demonstrates the RBI's proactive approach to managing the surge in foreign-currency inflows that has swelled cash in the financial system. The central bank's deployment of both VRRR auctions and government securities buybacks reflects a coordinated effort to absorb liquidity generated by its measures to attract foreign inflows to shore up the rupee. According to The Economic Times, "The preference is to park funds for a tenure of 1-3 days at 5.24% in VRRR, rather than a seven day or 15 day operation. The liquidity is also not very homogeneously spread across the system because only a few big banks are getting the benefit of the FCNR(B) deposit." As noted by Gopal Tripathi, head of treasury at Jana Small Finance Bank, "Most of the liquidity is being parked in VRRRs and in the RBI's standing deposit facility (SDF)." The central bank will be conducting a VRRR auction of one-day duration on September 2, 2026, to suck out ₹5 lakh crore from the banking system. As noted by market participants, demand remained subdued as liquidity in the banking system is unevenly distributed, with surplus funds concentrated with a few banks, leading to skewed liquidity among institutions. Experts expect this surplus liquidity will take some time to get absorbed into the credit market, but I expect the liquidity to normalise to ₹1-1.5 lakh crore by December, according to Alok Singh, head of treasury at CSB Bank.
