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August 31, 2026 at 4:56 PM IST
The sharp rise in banking system liquidity has put the Reserve Bank of India under pressure to absorb surplus cash, but the response to its latest longer-tenure variable rate reverse repo auction suggests the central bank may still have room to rely on market-based and reversible operations before considering more durable measures such as an increase in the cash reserve ratio.
The banking system liquidity surplus rose to 5.05 trillion rupees as of August 30 from 1.9 trillion rupees on August 2, more than doubling in four weeks and reaching its highest level since April 15. The daily average surplus rose to 3.57 trillion rupees in August from 1.07 trillion rupees in July.
With month-end government spending and bunched-up dollar swaps with the RBI adding to liquidity, the headline surplus could rise to 7-8 trillion rupees. The RBI's discounted non-resident deposit window is also due to close on Monday, while banks will be permitted to swap these dollars with the central bank more than once a week.
Against this backdrop, the RBI's 15-day VRRR auction for a notified 6 trillion rupees attracted bids worth only 1.35 trillion rupees, prompting some market participants to describe the response as weak. However, the headline bid amount does not fully capture the liquidity actually available for deployment into the operation.
Of the roughly 5 trillion rupees of surplus liquidity, around 2 trillion rupees would have represented funds banks would otherwise park in the RBI's standing deposit facility. Banks have maintained sizeable balances at the SDF, with average parking estimated at 2.1 trillion rupees over the past year, as 24x7 banking and the rise in online transactions have increased the need to hold excess balances after market hours rather than lend or invest them in the money market.
There are also near-term cash requirements. Excise tax outflows due over the coming weekend are expected to absorb another 600-700 billion rupees. This leaves a substantially smaller pool of immediately deployable liquidity, suggesting that offers of 1.35 trillion rupees at the 15-day VRRR were relatively decent rather than lacklustre.
The later auction results provide further context. An overnight VRRR operation conducted after a 15-day VRRR auction received offers of around 2.5 trillion rupees, underlining banks' preference for retaining flexibility when liquidity conditions are changing rapidly. The lower response to the longer-tenure operation could therefore reflect a tenor preference and expected cash outflows rather than an inability of the RBI to absorb surplus liquidity.
The size and tenor of the latest operation suggest that the RBI has first opted for larger, market-based and reversible liquidity absorption before resorting to a broad reserve measure. The 15-day operation has also tempered expectations of an immediate CRR increase or the introduction of an incremental CRR.
For the next two weeks, the RBI is likely to continue testing banks' appetite through additional VRRR auctions, including longer-tenure operations, while calibrating their timing around anticipated liquidity swings. Market participants expect the central bank to conduct further auctions this week, with reversals potentially aligned with advance tax outflows around September 15.
In line with market expectations, RBI announced 6-trillion-rupee 7-day VRRR auction for Tuesday.
If the surplus remains elevated even after festival-related currency demand increases, or if longer-tenure VRRRs continue to attract inadequate participation, expectations of an incremental CRR, a CRR increase or MSS auction or open-market bond sales could return. For now, however, the RBI appears likely to prefer flexible VRRR operations, allowing it to absorb the temporary liquidity surge while retaining the ability to quickly release funds when tax and currency-related outflows tighten conditions.
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