Amid the excess liquidity in the banking system due to the foreign currency inflows, the<a href="https://www.mid-day.com/business/business-news/article/rbi-india-remains-among-fastest-growing-major-economies-despite-global-uncertainties--23641204" target="_blank" rel="none noopener"> Reserve Bank of India</a> on Friday said it will absorb Rs 7 lakh crore of this surplus liquidity through its auction-based tool Variable Reverse Repo Rate (VRRR), according to news agency PTI.
The surplus liquidity in the banking system is estimated to be around Rs 10.32 lakh crore as on September 3.
"On a review of the current and evolving liquidity conditions, it has been decided to conduct a Variable Rate Reverse Repo (VRRR) auction on Monday, September 7, 2026," the RBI said in a release.
The central bank will conduct a 30-day VRRR auction for Rs 7 lakh crore on Monday, and this marks a transition toward a longer-duration liquidity absorption operation compared with recent auctions of up to 15 days, according to news agency IANS.
The auction will take place on September 7, between 9.30 am and 10.00 am, and the reversal of these funds will take place on October 7. The apex bank also said participants will have the option of premature reversal of the amount lent, including partial reversal.
The longer duration will allow the RBI to keep surplus funds out of the banking system allowing it to have greater control over short-term money-market conditions. However, the reverse repo mechanism is not as effective as some other liquidity-management tools because it depends on a bank's discretion to decide on the quantum of funds they want to park with the central bank.
<h2>What is reverse repo and variable reverse repo?</h2>
In a repo rate, commercial banks borrow money from RBI to meet their short-term requirements, whereas in a reverse repo, commercial banks can park their surplus funds with RBI and can earn a marginal interest on it. The repo rate is higher than the reverse repo rate. The reverse repo rate at present is 3.35 per cent, while the repo rate is 5.25 per cent.&nbsp;
Unlike the repo rate that is predetermined, in a VRRR the rate is discovered through competitive auctions conducted by RBI, where banks submit bids for the interest rate they are willing to accept.
According to a<a href="https://www.mid-day.com/business/business-news/article/indias-balanceofpayments-likely-to-post-surplus-of-usd-6575-billion-bank-of-baroda-report-23648359" target="_blank" rel="none noopener"> Bank of Baroda report</a>, RBI is actively absorbing excess liquidity as it announced Variable Rate Reverse Repo (VRRR) auctions adding to Rs 53.5 lakh crore between August 6 and September 2, while a Union Bank of India report had said the surplus liquidity would be the key policy challenge for the central bank.
On Friday, the RBI absorbed over Rs 6.02 lakh crore from the banking system through two VRRR auctions as surplus liquidity remained at a record high, as per PTI.
<h2>Why is there a liquidity surplus in the banking system?</h2>
There is a surplus liquidity in the system after the RBI, through its special forex swap window to bolster foreign-exchange liquidity, mobilised inflows of USD 136.4 billion.
India's foreign currency assets expanded by USD 47.9 billion, taking total foreign exchange reserves to a record USD 729.3 billion.
The RBI mobilised a record USD 127.23 billion through Foreign Currency Non-Resident (Bank), or <a href="https://www.mid-day.com/business/business-news/article/india-may-receive-fcnr-b-deposits-up-to-usd-85-billion-sbi-report-23641803" target="_blank" rel="none noopener">FCNR(B)</a>, deposits, as of August 31.
Including overseas foreign-currency borrowings (OFCB) worth USD 5.3 billion and external commercial borrowings (ECB) of USD 3.9 billion, the total inflows under the measures reached USD 136.377 billion.
<h2>Why did RBI launch FCNR swap window?</h2>
The Reserve Bank of India had launched the concessional FCNR swap window on June as part of broader steps to encourage capital inflows to boost India's balance of payments during global uncertainty. Under this facility, banks can mobilise new FCNR-B deposits and exchange the dollars with the RBI at a lower, concessional rate.
Several banks raised rates on 3-5 year FCNR(B) deposits from around 2-4 per cent to 6-7 per cent, making the deposits more attractive to NRIs, as per IANS.
The facility that was implemented on June 8, 2026, and is available up to September 30, 2026, for the FCNR (B) deposits and up to December 31, 2026, for the Overseas Foreign Currency Borrowings and External Commercial Borrowings.
The government and RBI announced these measures to boost inflows as the West Asia crisis created significant challenges for the Indian economy. The <a href="https://www.mid-day.com/business/business-news/article/global-crude-oil-prices-climb-above-usd-100-as-usiran-conflict-intensifies-23641363" target="_blank" rel="none noopener">rising oil prices</a> and foreign portfolio investor outflows led to concerns over external stability given India is the third largest consumer and importer of crude oil.
(With inputs from PTI and IANS)

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