Mumbai- The Reserve Bank of India (RBI) absorbed more than Rs 3.53 lakh crore from the banking system through an overnight Variable Rate Reverse Repo (VRRR) auction on Monday, as it stepped up efforts to manage surplus liquidity in the financial system.
The central bank had announced a target of Rs 5 lakh crore for the one-day auction, but banks submitted bids totalling Rs 3,53,390 crore. The RBI accepted the entire amount at both a cut-off rate and a weighted average rate of 5.24 per cent.
The operation is part of the RBI’s liquidity management measures. A VRRR auction allows the central bank to temporarily absorb surplus funds from banks, helping keep short-term money market conditions orderly without permanently tightening monetary policy.
The latest operation comes against the backdrop of a sharp increase in liquidity following large foreign-currency inflows into India. The surge has been linked particularly to the RBI’s special facility aimed at encouraging Non-Resident Indians to bring more funds into the Indian banking system through FCNR(B) deposits.
The RBI had launched a special dollar-rupee swap facility on June 8 covering FCNR(B) deposits, Overseas Foreign Currency Borrowings (OFCB) and External Commercial Borrowings (ECB). The initiative triggered an unusually strong response, with foreign exchange inflows reaching around $73 billion in less than 11 weeks.
FCNR(B) deposits alone contributed $65.40 billion, reflecting strong participation by NRIs and a significant increase in foreign-currency mobilisation through the Indian banking system.
The scale of the inflows was considerably larger and faster than the RBI’s 2013 FCNR(B) swap programme, which mobilised about $26 billion over roughly three months. The latest response therefore emerged as an important factor behind the RBI’s increased efforts to absorb excess liquidity.
The strong demand also prompted the central bank to close the FCNR(B) window earlier than originally planned. The facility, which was initially scheduled to remain open until September 30, was closed on August 31 after the RBI said its objective had been achieved ahead of schedule.
By absorbing surplus funds through VRRR operations, the RBI is seeking to prevent excess liquidity from creating undue volatility in short-term interest rates while maintaining orderly conditions in the financial markets.
–IANS