Surplus liquidity: RBI mops up ₹6 lakh crore in two auctions amid surplus liquidity

The Reserve Bank of India mopped up more than ₹6 lakh crore of surplus funds from the banking system through two auctions on Monday, September 7, as it worked to absorb excess liquidity. However, banks showed a mixed response to the central bank's liquidity operations.

The first 30 day variable rate reverse repo auction received bids of just over ₹2.59 lakh crore against the notified amount of ₹7 lakh crore, pointing to a relatively weak response from banks.

RBI conducts two liquidity auctions

The RBI had announced the 30 day VRRR auction the previous week to absorb surplus liquidity from the banking system. The response from banks was lower than the notified amount, prompting the central bank to announce another auction during the first half of Monday.

Through the two auctions, the RBI absorbed more than ₹6 lakh crore from the banking system. The move comes as banks continue to hold surplus funds, giving the central bank a way to manage liquidity conditions in the financial system.

What is VRRR and why does RBI use it?

A variable rate reverse repo allows banks to park surplus funds with the RBI for a specified period. The central bank uses such operations to manage the amount of money available in the banking system and keep short term liquidity conditions in line with its monetary policy stance.

Unlike a fixed rate operation, the interest rate in a VRRR auction is determined through the bids submitted by participating banks. The 30 day tenor in Monday's auction gave banks an option to park excess funds with the RBI for a longer period.

Surplus liquidity remains in focus

The latest auctions show the RBI's continued focus on managing surplus liquidity in the banking system. The central bank can use liquidity operations alongside other monetary tools depending on prevailing conditions.

Banks' response to future VRRR auctions will be closely watched as the RBI continues to assess liquidity conditions and the amount of surplus funds available in the financial system.