RBI's first big liquidity mop-up after rate hike falls short as banks park less than half the target

Kolkata: The Reserve Bank of India's first major attempt to drain surplus liquidity and improve transmission of its rate hike met with a muted response.

Banks parked just Rs 79,655 crore in the central bank’s 29-day variable rate reverse repo (VRRR) auction, less than half of the Rs 2 lakh crore absorption plan.

The weak response came despite the RBI allowing banks to withdraw funds with two days’ notice. The RBI had said while announcing its policy that it would use various liquidity-management tools to improve transmission of the rate hike.


"Banks with visibility of 30 days of surplus liquidity participated in the 29-day VRRR. Although RBI offers the call option, several banks do not take part in long term VRRR as the RBI offers the daily VRRR option," a treasury head with a private sector bank said.

The RBI absorbed Rs 1.61 lakh crore Thursday using the daily VRRR against a notified amount of Rs 2 lakh.

The inter-bank market was sitting on Rs 4.24 lakh crore of surplus at the end of October 7, RBI data showed.

Although monetary transmission happens automatically for the repo-linked loans, marginal cost based pricing takes a little time to adjust to the new policy rate. Deposit rates, on the other hand, are not expected to rise immediately since banks have enough lendable resources at present backed by the foreign-currency linked deposit cushion.

During August and September, system liquidity increased substantially on account of the RBI's dedicated dollar mobilisation programme, which was followed up by a dollar-rupee swap. The system liquidity stood at an average daily surplus of Rs 5.9 lakh crore since early August 2026, RBI said.

Governor Sanjay Malhotra Wednesday said that the surplus liquidity is expected to drain out by the end of the current fiscal. He said that the central bank would use an appropriate mix of liquidity management tools and strive to align the weighted average call rate (WACR) with the policy repo rate.