Why RBI is draining excess liquidity but also injecting funds
Reserve Bank of India has significantly reduced banking system liquidity from a peak surplus in a short time. Liquidity surged after banks received funds from overseas Indians under the FCNR(B) scheme. The central bank utilized reverse repo auctions and cash reserve ratio adjustments to absorb this surplus effectively. As overnight rates increased following these liquidity measures, RBI…
In just over six weeks, the Reserve Bank of India (RBI) has reduced excess liquidity in the banking system from a peak surplus of ₹11 lakh crore to ₹48,303 crore, according to ET. The central bank achieved this through various measures, each with its impact on the market.
The initial surge in liquidity happened when banks attracted $133 billion from overseas Indians under the FCNR(B) scheme. The banks swapped these dollars for rupees with the RBI, increasing system liquidity from about ₹3.5 lakh crore to over ₹11 lakh crore. Overnight rates dropped to 4.93% in mid-September, 30 basis points below the repo rate.
However, rising crude oil prices fueled expectations of an RBI rate hike to curb inflation, which would require neutral or deficit liquidity conditions. Despite this, banks kept overnight rates below the repo rate, potentially weakening the impact of monetary tightening.
To absorb surplus liquidity, the RBI employed temporary variable rate reverse repo (VRRR) auctions, conducted $10 billion sell-buy swaps, and raised the daily cash reserve ratio (CRR) to 99%, limiting banks' flexibility to use those funds. This helped the RBI align money-market conditions with its tightening stance. Despite the liquidity drain, the WACR rose to 5.75%, 25 basis points above the 5.50% repo rate.
In response, the RBI announced a variable rate repo (VRR) operation to inject funds, conducting a ₹1 lakh crore VRR auction on Monday and a ₹50,000 crore operation on Friday.
Written by urgent.news from The Economic Times - Top News's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
