Now, the central bank is weighing how best to sterilise this liquidity.
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Reserve Bank of India senior officials on Thursday met with treasury heads of major banks in the backdrop of banking liquidity surplus soaring to ₹9.70 lakh crore.The meeting was called to assess market players views on the current and emerging liquidity situation, said sources.The huge liquidity surplus is the result of RBI providing concessional swap window to banks during the June 8-August 31, 2026 period so that they can swap fresh Dollar-denominated deposits of 3-5 years duration mobilised by them for rupees. Now, the central bank is weighing how best to sterilise this liquidity. Liquidity absorption tools that are being examined include a temporary cash reserve ratio hike, open market operation sale of Government securities (G-Secs), issuing bills/ bonds under the Market Stabilisation Scheme (MSS), and announcing a calendar of VRRR auctionsRadhika Rao, Senior Economist & Executive Director, DBS Bank, said: “Given the swap arrangement, these inflows (due to FCNR(B) deposits, ECB and OFCBs) will add to an already abundant rupee liquidity backdrop, which was at a four year high this month, depressing overnight rates.“While organic drivers like tax-related outflows, and seasonal currency leakage, in addition to Current Account Deficit (1.1 per cent of GDP), portfolio outflows, and maturity of the forwards book will act as counter-balancing factors, yet concerted steps will be required to drain the potential surge in liquidity.”Near-term optionsRao said near-term options include: temporary cash reserve ratio (CRR) hike (in proportion to increase in Deposits to ensure it syncs with scale of funds raised amongst banks); open market operations (OMOs) or market stabilisation scheme (MSS), which will mop up liquidity without distorting the FX forward curve, but could push up yields; cash management bills to bridge temporary cash flow mismatch; and calendar for money market operations like VRRR but for shorter tenors.Barclays, in a report, estimate that about ₹7.5 lakh crore of liquidity overhang needs to be addressed.“We expect a mix of continued variable reverse repo rate ops (VRRRs), and an incremental cash reserve ratio hike (ICRR) to be deployed; concurrently, an increase in currency in circulation in the festive period (September-November) and forex interventions will also take out liquidity.“We do not expect permanent liquidity absorption tools such as CRR hike (without a sunset clause), OMO sales, or MSS.Retiring soon-to-mature dollar forwards can address two problems simultaneously - the large liquidity surplus and the impending large-short forward book build-up — but the RBI would need to carefully weigh the costs of this measure, if they choose to announce this,” per the report.VRRR auctionsTo absorb excess liquidity from the banking system, the RBI on Thursday conducted two Variable Rate Reverse Repo (VRRR) auctions.Under the first overnight VRRR auction to drain out ₹6 lakh crore surplus liquidity from the banking system, the central bank received and accepted offers aggregating ₹5,18,742 crore at a weighted average rate (WAR) of 5.24 per cent.In the second overnight VRRR auction of ₹1.50 lakh crore, the RBI received and accepted offers aggregating ₹34,652 crore at a WAR of 5.24 per cent.The RBI will conduct a 3-day VRRR on Friday to absorb surplus liquidity amounting to ₹7 lakh crore from the banking system.Published on September 3, 2026
