RBI Absorbs ₹71,971 Crore Liquidity through VRRR

Context:

Recently, The Reserve Bank of India (RBI) absorbed ₹71,971 crore from the banking system through an overnight Variable Rate Reverse Repo (VRRR) auction on 22 September 2026. The move aims to manage surplus liquidity and keep short-term money-market rates aligned with the monetary-policy framework.

What is VRRR?

• • • Variable Rate Reverse Repo (VRRR) is an auction-based liquidity-absorption tool through which banks temporarily park surplus funds with the RBI at a market-determined rate.
      • Reverse Repo: Banks lend funds to RBI.
      • VRRR: Interest rate is determined through auction.
      • Purpose: Absorb excess/transient liquidity.
    • It helps keep the Weighted Average Call Rate (WACR) aligned with the policy repo rate. RBI has used VRRR auctions as part of its liquidity-management framework.

Current Liquidity Situation:

• • • The banking system currently has an estimated surplus liquidity of around ₹4.92 lakh crore. Such excess liquidity can put downward pressure on overnight money-market rates and cause them to move below the RBI's desired operating level.
    • The RBI therefore uses liquidity-management instruments to maintain orderly and balanced financial conditions.

Reasons for Surplus Liquidity:

The present liquidity surplus has been attributed mainly to:

• • • Heavy mobilisation of FCNR(B) deposits: Foreign Currency Non-Resident deposits brought additional foreign-currency inflows into the banking system.
    • Currency swaps with RBI: Such operations can alter rupee liquidity available to banks.
    • Government expenditure: Month-end spending on salaries, pensions and other government payments injects liquidity into the banking system.

Why is RBI Absorbing Liquidity?

• • • Inflation Control: Excess liquidity can increase credit and aggregate demand, creating inflationary pressures.
    • Monetary Policy Transmission: Liquidity management helps short-term market rates move in line with the policy rate.
    • Financial Stability: It prevents excessive surplus funds from encouraging speculative or riskier lending.
    • Managing Capital Inflows: Large capital/forex inflows can create additional rupee liquidity, requiring sterilisation.

Legal and Institutional Framework:

• • • Reserve Bank of India Act, 1934
      • Section 17: Provides the statutory framework for RBI’s banking and monetary operations, including liquidity-management operations.
      • Section 42(1): Empowers RBI to prescribe Cash Reserve Ratio (CRR) for scheduled banks.
      • The Standing Deposit Facility (SDF) was enabled through an amendment to Section 17. Unlike collateralised reverse-repo operations, SDF allows RBI to absorb liquidity without providing collateral.
    • Banking Regulation Act, 1949
      • Section 24: Provides the statutory framework for the Statutory Liquidity Ratio (SLR), requiring banks to maintain prescribed liquid assets.

Major Liquidity Absorption Instruments:

About LAF Corridor:

• • • SDF: Floor of the corridor
    • Repo Rate: Central policy rate
    • MSF: Ceiling of the corridor
    • RBI uses this framework to influence short-term interest rates and liquidity conditions.

Significance for India:

• • • Supports price stability.
    • Improves monetary-policy transmission.
    • Maintains orderly money markets.
    • Prevents excessive surplus liquidity.
    • Balances liquidity management with credit availability.

Conclusion:

The RBI’s VRRR operation demonstrates fine-tuning of systemic liquidity without necessarily changing the policy repo rate. Such instruments are essential for maintaining monetary stability, effective policy transmission and orderly functioning of financial markets.