RBI Drains ₹3.93 Lakh Crore, Here's What Surplus Cash Means For Loans And Deposits

Mumbai: The Reserve Bank of India (RBI) absorbed Rs 3.93 lakh crore from the banking system through a variable rate reverse repo (VRRR) auction, as surplus liquidity remained high.

The central bank received bids worth Rs 3,93,352 crore against the notified amount of Rs 5 lakh crore. It accepted all bids at a cut-off and weighted average rate of 5.24 percent.

Why RBI Is Draining Funds?

Banking system liquidity was estimated at Rs 10.73 lakh crore on September 11. The RBI has conducted VRRR auctions to remove excess cash and keep overnight money-market rates aligned with its 5.25 percent repo rate.

The surplus was created by mobilisation of Foreign Currency Non-Resident (Bank), or FCNR(B), deposits. Banks brought foreign currency and swapped it with the RBI for rupees, increasing funds available for lending.

Government spending towards salaries and pensions added cash to the system.

More Measures Planned

The RBI has also announced open market operation sales of government securities worth Rs 1 lakh crore in three tranches. It will sell Rs 50,000 crore on September 17, followed by Rs 25,000 crore each on September 21 and September 28.

When banks buy these securities, money moves to the RBI, reducing funds available in the financial system.

Impact On Customers And Markets

High liquidity can make loans cheaper because banks have more money to lend. However, cash-rich banks may have less reason to offer attractive interest rates on new fixed deposits.

Surplus funds can support equities and bonds. Strong bond demand generally raises prices and lowers yields, while returns from liquid and ultra-short-duration debt funds may weaken as short-term market rates decline.

Prolonged surplus liquidity can also reduce the effectiveness of monetary policy. Banks competing to lend excess funds may push the weighted average call rate towards the 5 percent Standing Deposit Facility rate, below the repo rate. By draining cash, the RBI aims to restore better control over short-term rates and ensure its policy signals reach borrowers, depositors and markets more clearly.