RBI Moves To Mop Up Record Cash Glut, Plans To Lock Away ₹7 Lakh Crore Of Excess Banking Liquidity for 30 Days
· Free Press Journal
Mumbai: The Reserve Bank of India (RBI) is stepping up its liquidity management efforts as India’s banking system grapples with a record pile-up of surplus cash following massive foreign currency inflows.
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The central bank will conduct a 30-day Variable Rate Reverse Repo (VRRR) auction worth Rs 7 lakh crore on Monday, marking a shift towards longer-duration liquidity absorption.
RBI Targets Record Liquidity Surplus
Recent RBI VRRR auctions have largely carried maturities of up to 15 days. The latest operation will allow the central bank to keep surplus funds locked away for a longer period and tighten its grip on short-term money market conditions.
RBI Faces Potential $10.6 Billion Cost After Record Diaspora Deposit Inflows Under Forex Swap FacilityBanks, however, can decide how much money they want to park with the RBI under the VRRR mechanism.
India’s banking system liquidity surplus is estimated at around Rs 10.5 lakh crore, according to a Bloomberg Economics measure.
Foreign Currency Inflows Fuel Cash Glut
The sharp rise in liquidity followed the RBI’s successful initiative to attract foreign currency deposits from overseas Indians.
The programme mobilised a record $127 billion before being closed a month ahead of schedule in August. Including subsidised overseas borrowings by banks and state-owned companies, total inflows reached around $136.4 billion.
RBI’s Policy Push Could Help India Maintain Balance-of-Payments Buffer Of Up To $75 Billion In FY27While these inflows strengthened India’s external financial position, their conversion into rupees significantly increased liquidity available to banks.
Money Market Rates Feel the Impact
The cash glut has already pushed the weighted average call rate below the RBI’s policy rate as abundant funds lower overnight borrowing costs.
The longer VRRR auction is therefore expected to help the RBI absorb excess liquidity while maintaining greater control over monetary conditions, particularly as policymakers remain focused on managing inflationary pressures.