MUMBAI, September 18, 2026: The Reserve Bank of India stepped up its liquidity management operations on Friday, absorbing Rs 2.23 lakh crore from the banking system through a three-day Variable Rate Reverse Repo (VRRR) auction, as surplus funds continued to remain elevated across banks.

The central bank received bids worth Rs 2,22,629 crore against a notified amount of Rs 2.25 lakh crore and accepted the entire amount offered by participating banks. The funds were absorbed at a cut-off and weighted average rate of 5.24 per cent.

The operation is part of the RBI’s ongoing efforts to manage excess liquidity and keep overnight money-market rates aligned with its policy stance. The three-day funds parked with the central bank are scheduled to reverse on September 21, making the operation a temporary liquidity-management measure rather than a permanent withdrawal of money from the financial system.

The latest auction comes against the backdrop of a sizeable liquidity surplus in the banking system. RBI data showed that surplus liquidity stood at approximately Rs 6.94 lakh crore as of September 17.

The figure, however, represents a moderation from the estimated surplus of around Rs 10.73 lakh crore on September 11, indicating that recent RBI operations have already absorbed a significant amount of excess funds.

For the central bank, the challenge is to ensure that abundant liquidity does not push short-term market rates materially away from the policy repo rate. VRRR operations provide the RBI with a flexible mechanism to temporarily take excess funds out of circulation while allowing banks to earn a return on the money parked with the central bank.

Under a Variable Rate Reverse Repo operation, banks bid to place surplus funds with the RBI for a specified period. Unlike a fixed-rate reverse repo, the interest rate is determined through the auction process.

The mechanism allows the RBI to calibrate liquidity conditions according to prevailing market requirements. When surplus cash is high, banks have less incentive to borrow from one another, which can place downward pressure on overnight money-market rates.

By absorbing excess funds, the RBI can help maintain closer alignment between short-term market rates and the policy repo rate, thereby supporting the transmission of monetary policy.

The latest VRRR auction is not an isolated liquidity operation. The RBI has also been using open market operations to absorb surplus funds from the banking system.

On Thursday, the central bank sold government securities worth Rs 50,000 crore through an OMO auction. Two additional government-security sales of Rs 25,000 crore each have been scheduled for September 21 and September 28.

The combination of VRRR operations and OMO sales gives the RBI different tools to address liquidity conditions over varying time horizons. While a VRRR operation temporarily absorbs funds, an OMO sale involves the outright sale of government securities.

One of the factors contributing to the current liquidity surplus has been strong mobilisation of Foreign Currency Non-Resident (Bank), or FCNR(B), deposits.

Subsequent currency swaps with the RBI have released additional rupee liquidity into the banking system. Month-end government spending, including payments related to salaries and pensions, has also contributed to the availability of funds with banks.

The resulting liquidity conditions have given banks a substantial pool of funds that can either be deployed for lending and investment or parked with the central bank.

Friday’s operation follows another sizeable VRRR auction conducted earlier in the week.

In that auction, the RBI received bids worth Rs 3,93,352 crore against a notified amount of Rs 5 lakh crore and accepted the entire amount offered. The funds were also absorbed at a 5.24 per cent cut-off and weighted average rate.

The sequence of auctions highlights the central bank’s continuing focus on calibrating liquidity rather than allowing excess funds to accumulate unchecked in the financial system.

The RBI’s liquidity operations are closely watched by banks, money-market participants and fixed-income investors because the availability of surplus cash influences overnight rates and short-term funding conditions.

A large liquidity surplus can make funds readily available in the banking system, potentially putting downward pressure on short-term market rates. RBI absorption operations can help moderate that excess and keep money-market conditions consistent with the central bank’s broader monetary policy framework.

For banks, however, the impact is also linked to the relative attractiveness of deploying funds in loans, securities or central-bank facilities. The VRRR rate of 5.24 per cent provides a benchmark for banks deciding how to deploy short-term surplus funds.

The current situation illustrates the balancing act faced by the RBI. Excess liquidity can support financial-market stability and provide banks with ample resources, but very large surpluses can also affect the transmission of monetary policy by keeping short-term market rates below the desired level.

The central bank therefore has to calibrate its interventions carefully—absorbing funds when necessary while ensuring that the banking system retains sufficient liquidity to meet credit and settlement requirements.

The reduction in surplus liquidity from around Rs 10.73 lakh crore on September 11 to Rs 6.94 lakh crore on September 17 suggests that the recent measures are already changing the liquidity profile of the banking system.

With additional OMO sales scheduled for September 21 and September 28, liquidity management is likely to remain an important feature of India’s money markets in the near term.

The September 18 VRRR auction demonstrates that the RBI is using multiple instruments to manage the volume and cost of money in the banking system. As banks navigate changing deposit flows, government spending and foreign-currency-related liquidity, the central bank’s operations will remain important for keeping short-term market conditions orderly.

For the banking sector, the immediate message is clear: surplus liquidity remains substantial, but the RBI is actively recalibrating it rather than allowing excess funds to freely influence overnight market rates.