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Informist, Friday, Apr. 10, 2026

 

By J. Navya Sruthi

 

MUMBAI – The Reserve Bank of India successfully drained surplus liquidity from the banking system after it rose to a near-four-year high Wednesday. However, the move is unlikely to exert pressure on systemic liquidity or lead to any uptick in money market rates, participants said. Most dealers expect the weighted average call rate – the operating target of monetary policy – to remain near the lower end of the RBI's liquidity adjustment facility corridor of 5.00% in April.

 

RBI Governor Sanjay Malhotra Wednesday said the central bank wants to keep enough liquidity for banks to be able to deal with global uncertainty, which was seen as an indication that a variable rate reverse repo auction was unlikely this month. However, the RBI announced a seven-day VRRR auction Friday for INR 2 trillion, a first such drain of temporary liquidity in four months. The central bank received INR 2.09 trillion offers and accepted INR 2.00 trillion at a cut-off rate of 5.24%. The announcement came as a surprise to market participants and initially pushed up call money and tri-party repo rates.

 

Low money market rates and a mounting liquidity surplus likely prompted the RBI to take the measure, dealers said. The net liquidity absorbed from the banking system by the RBI, which is a proxy for the daily liquidity surplus, was INR 4.57 trillion on Wednesday, the highest since May 19, 2022. It was nearly the same Thursday at INR 4.55 trillion and stands around 1.8% of the net demand and time liabilities of banks, against the 1% surplus that Malhotra has described in the past as comfortable.

 

The "excessive" liquidity and redemption of 5.63%, 2026 bond, which added INR 865.05 billion to the existing liquidity surplus Friday, pulled down the weighted average call rate 5.04% Friday despite three-day funding requirements and the VRRR auction. The central bank may have timed its announcement at 1213 IST since early fund requirements from primary dealers were met but before banks and mutual funds parked their liquidity surpluses elsewhere, dealers said.

 

"We have pre-payment of bond redemption today (Friday) as it will be maturing on Sunday, which is why RBI brought VRRR. It was a much-needed move with SDF at INR 5 trillion," a dealer a large state-owned bank said.

 

The surplus rose on Wednesday due to the redemption of the 7.63%, 2026 gilt, part of the INR 1.56-trillion in gilt repayments scheduled in April. This exceeds the INR 1.24 trillion of gross issuance of government securities during the month and may even push the net liquidity absorbed to over INR 5 trillion, dealers said. The government's spending at the end of March and the beginning of April has led to a continuous increase in the net liquidity absorbed from a meagre INR 487 billion as on Mar. 25. 

 

The central bank's own liquidity measures have also contributed to a build-up of durable liquidity that is now translating into the banking system. The RBI infused nearly INR 9 trillion of durable liquidity through gilt purchases in FY26 while also cutting banks' cash reserve ratio and conducting dollar-rupee buy-sell swap auctions, in consonance with the Monetary Policy Committee's rate cutting cycle.

 

Low money market rates tend to lead to inflationary pressures in the economy as banks use the cheap funding costs to extend loans. Corporate borrowing through commercial paper has already picked up to take advantage of the fall in rates. Moreover, the investment returns of lenders – usually large state-owned banks and mutual funds – collapse due to the decrease in borrowing costs.

 

Still, the market does not see this VRRR leading to any spike in the weighted average call rate as there would be comfortable liquidity remaining in the system despite this drain. Banks sitting on funds at 5.00% jumped at the opportunity to lock in a rate of return near the repo rate for seven days.

 

"Liquidity surplus will be sufficient so there will not be pressure on overnight rates. RBI will monitor and keep WACR (weighted average call rate) closer to repo (rate)," a dealer at a private-sector bank said.

 

Banks have parked an average of INR 4.99 trillion at the RBI's Standing Deposit Facility so far in April, with loan growth seasonally slowing down in the June quarter. Some lenders have started moving to invest this surplus in bonds, which got a jolt in the middle of the day after the announcement. Short-term gilt yields rose suddenly but ended lower as traders realised the impact on rates and borrowing requirements would be minimal, dealers said. 

 

"This ample liquidity has been going into (RBI's) SDF (standing deposit facility) every day and if this (INR) 2 trillion goes out from here, it will still leave (INR) 3 trillion," a dealer at a primary dealership said. "WAR (weighted average call rate) will still be below repo rate." 

 

Market participants expect the liquidity surplus to remain above INR 4 trillion next week due to another bond redemption on Apr. 17. In fact, some dealers now say that there is space for the central bank to roll over the INR-2.00-trillion VRRR auction entirely despite goods and services tax inflows of around INR 1.8 trillion scheduled around Apr. 20. Others said the central bank trim the quantum of the roll-over or the tenure as those outflows materially wipe off some of the excess cash with banks.

 

"It is possible that RBI will roll over this (seven-day) VRRR. RBI may not keep the tenure this long and limit it to just three days as we have GST outflows in the third week," the dealer at the large state-owned bank said. Before those outflows, a few dealers also expect another short-term VRRR auction for INR 500 billion to INR 1 trillion as an additional liquidity drain if money market rates continue to remain low. 

 

Through its liquidity actions, traders are confident the central bank will do little to disturb the comfort in the money markets. And while the announcement may have caught traders on the wrong foot, they expect playing through it will not be a worry.  End

 

Edited by Deepshikha Bhardwaj

 

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