RBI on Tuesday absorbed Rs 71,971 crore from banking system through overnight variable rate reverse repo auction amid huge surplus. Liquidity estimated surplus around Rs 4.92 lakh crore as of Sept 21. Auction held for Rs 75,000 crore, offers received for 96% amount for rate of 5.24%, tenor one day.
VRRR is rate at which banks park funds with RBI, tool to suck liquidity. Keeping excess liquidity can be inflationary, RBI absorbing after overwhelming response from special deposit scheme for NRIs filling up coffers with $133 billion. VRRR operation also intends to bring overnight call money rate in sync with repo rate ahead of potential rate hike cycle.
Why such surplus? Three reasons - government spending slow, RBI dollar purchases injecting rupees, NRI deposit scheme. Surplus pushes call rate below repo, distorting transmission. Absorbing via VRRR is routine fine-tuning, but Rs 71k crore overnight absorption signals RBI uncomfortable with surplus at 5%+ inflation risk and rupee pressure.
For banks, parking at 5.24% better than lending at risk. For economy, surplus should mean cheaper loans, but credit offtake muted due to high rates and tariff uncertainty. RBI stuck - it wants to keep liquidity tight enough to control inflation but not so tight to choke growth.
This VRRR is also signal before October MPC - RBI preparing market for hawkish hold. With US tariffs and oil above $100, RBI cannot afford excess liquidity feeding import demand. Sucking liquidity is sucking oxygen from inflation fire - necessary but painful.