MUMBAI: RBI's Historic Move to Absorb Excess Liquidity

The Reserve Bank of India (RBI) is set to conduct a landmark Rs 2.5-lakh-crore variable rate reverse repo (VRRR) auction this Friday. This decisive action aims to tackle the overwhelming liquidity surplus in the banking system, which has ballooned to nearly Rs 9 lakh crore.

Understanding the Liquidity Surge

This liquidity glut stems from vigorous government expenditures, including significant fiscal outflows and subsidies, alongside RBI's foreign exchange interventions that have injected additional rupee liquidity into the system. Compounding the issue, deposit growth has outstripped credit growth, leaving banks awash with funds they struggle to deploy profitably.

Regulatory Changes and Their Impact

Recent adjustments to regulations, such as modifications to the liquidity coverage ratio, have further augmented banks' capacity to lend, exacerbating the liquidity surplus. The VRRR auction emerges as a critical mechanism for the RBI to absorb this excess, offering a competitive bidding platform for banks to align overnight rates with the central bank's policy goals.