RBI Drains ₹3.93 Lakh Crore, Here's What Surplus Cash Means For Loans And Deposits

On September 11, the Reserve Bank of India (RBI) assessed the liquidity in the banking system at Rs 10.73 lakh crore. To address the surplus funds, the central bank conducted a variable rate reverse repo (VRRR) auction, absorbing Rs 3.93 lakh crore from the banking system. In total, the RBI received bids worth Rs 3,93,352 crore, accepting all at a cut-off and weighted average rate of 5.24 percent.

The RBI drained excess cash primarily to maintain overnight money-market rates aligned with its 5.25 percent repo rate. This liquidity surge had been created by foreign currency deposits brought in by banks and the government's spending on salaries and pensions. Looking ahead, the RBI announced open market operations selling government securities worth Rs 1 lakh crore in three installments starting September 17.

High liquidity can lead to lower loan interest rates for customers, as banks have more money to lend. However, banks with surplus cash may offer less competitive rates on new fixed deposits. A cash-rich banking sector might also have less incentive to provide attractive returns on fixed deposits. Regardless, surplus funds can support equities and bonds, increasing prices and lowering yields.

Prolonged surplus liquidity could, however, weaken the effectiveness of monetary policy. To counter this, the RBI aims to restore better control over short-term rates through its cash-draining measures.