RBI Lengthens Liquidity Absorption to Curb Surge in Banking Cash

The Reserve Bank of India is extending the duration of its cash-absorption measures to manage an unprecedented liquidity surplus driven by massive foreign currency inflows.

The central bank announced it will conduct a 30-day Variable Rate Reverse Repo (VRRR) auction worth ₹7 trillion ($74.1 billion). This shift to a one-month window, up from recent operations limited to 15 days, allows the RBI to sterilize surplus rupee funds for longer intervals. While participation remains voluntary for commercial lenders, the facility includes an option for early withdrawal.

India’s financial system currently holds a record ₹10.5 trillion in surplus liquidity. This overhang stems largely from the central bank converting heavy dollar inflows into rupees after commercial lenders mobilized deposits from the non-resident Indian diaspora. That foreign-deposit drive attracted $127 billion, wrapping up a month ahead of schedule in August. Factoring in concessional overseas borrowing by lenders and state-backed entities, aggregate foreign exchange inflows touched $136.4 billion.

This cash glut presents a policy dilemma amid stubborn inflationary risks, particularly from elevated global crude prices. The surplus has pushed the weighted average call money rate below the benchmark policy repo rate, softening market borrowing costs when monetary authorities are actively aiming for tighter conditions.