RBI drains Rs 3.93 lakh crore from banks ahead of repo rate decision

Before the Reserve Bank of India's Monetary Policy Committee announces its decision on the repo rate, the central bank has taken a major step. On Tuesday, RBI withdrew Rs 3,93,352 crore in liquidity from banks through a Variable Rate Reverse Repo (VRRR) auction.

RBI carries out such action to prevent excess money from flooding the market, keep inflation under control and maintain stability in the banking system. According to a press release, the central bank had invited bids for a notified amount of Rs 5 lakh crore in this auction, against which it received bids worth Rs 3,93,352 crore. These bids were accepted at a cut-off rate of 5.24 percent and at the weighted average rate.

RBI has been conducting VRRR auctions for the past month to absorb extra liquidity present in the banking system and to bring overnight money market rates in line with the repo rate. It is estimated that around Rs 10.73 lakh crore in extra liquidity will remain in the banking system until September 11.

Besides this, RBI had also announced last week an open market operation to sell government bonds in three tranches, with a notified amount of Rs 1 lakh crore. Its first auction will be held on September 17.

RBI said the first tranche will be of Rs 50,000 crore, to be conducted on September 17, while the subsequent tranches of Rs 25,000 crore each will be conducted on September 21 and September 28.

One reason for this rise in liquidity in the banking system is that banks deposited large amounts under FCNR(B) deposits, bringing foreign currency into the system. Following this, swaps with RBI provided banks with rupee liquidity. Besides the foreign currency coming in under FCNR(B), liquidity in the banking system has also increased due to government spending at the end of the month, including salary and pension payments.