RBI absorbs Rs 3.93 lakh crore through VRRR auction: What it means

The Reserve Bank of India (RBI) on Tuesday absorbed Rs 3,93,352 crore through a variable rate reverse repo (VRRR) auction amid surplus liquidity in the banking system.

The central bank received bids worth Rs 3,93,352 crore against a notified amount of Rs 5 lakh crore. It accepted all the bids at a cut-off and weighted average rate of 5.24 per cent, according to an RBI release.

RBI steps in to absorb surplus liquidity

The RBI has been conducting VRRR auctions over the past month to withdraw excess liquidity from banks and keep overnight money market rates aligned with the repo rate.

The surplus liquidity in the banking system was estimated at around Rs 10.73 lakh crore as of September 11.

The latest VRRR auction comes days after the RBI announced Open Market Operation (OMO) sales of government securities worth Rs 1 lakh crore.

The OMO sales will be conducted in three tranches. The first auction, involving securities worth Rs 50,000 crore, is scheduled for September 17. Two more auctions of Rs 25,000 crore each will follow on September 21 and September 28.

Why is banking system flush with funds?

The banking system has been carrying substantial surplus liquidity following heavy mobilisation of FCNR (B) deposits by banks. These deposits brought foreign currency into the system, while subsequent swaps with the RBI provided banks with additional rupee liquidity.

Government spending has also contributed to the surplus. Month-end expenditure, including payments towards salaries and pensions, has added further funds to the banking system.

With liquidity remaining high, the RBI has been using tools such as VRRR auctions and OMO sales to absorb excess funds and manage conditions in the money market.