RBI's first big liquidity mop-up after rate hike falls short as banks park less than half the target

The Reserve Bank of India's initial effort to absorb excess liquidity and ensure the smooth transmission of its rate hike yielded limited results.The central bank's 29-day reverse repo auction, intended to soak up Rs 2 lakh crore, saw only Rs 79,655 crore parked in its account - less than half of the planned absorption.The weak participation persisted despite the RBI's decision to allow banks to withdraw funds with just two days' notice.The RBI had announced the use of various liquidity-management tools to expedite the rate hike's transmission, but many banks chose not to participate in the longer-term reverse repo auction due to the availability of the daily reverse repo option.The RBI managed to absorb Rs 1.61 lakh crore through the daily reverse repo against the notified amount of Rs 2 lakh.The inter-bank market was holding Rs 4.24 lakh crore of surplus liquidity at the end of October 7, according to RBI data.The inter-bank market was holding Rs 4.24 lakh crore of surplus liquidity at the end of October 7, according to RBI data.According to an RBI report, system liquidity had surged substantially in August and September following a dedicated dollar mobilisation programme and a subsequent dollar-rupee swap.The system liquidity averaged a daily surplus of Rs 5.9 lakh crore since early August 2026, RBI said.Governor Sanjay Malhotra stated on Wednesday that the surplus liquidity is expected to dissipate by the end of the current fiscal year.The central bank plans to employ a mix of liquidity management tools to align the weighted average call rate with the policy repo rate.