The Reserve Bank of India (RBI) absorbed more than ₹6 trillion ($63.53 billion) from the banking system through cash withdrawal operations on Monday, September 7, after surplus liquidity reached a record level.
The central bank received bids worth ₹3.53 trillion in an overnight auction after banks had already placed ₹2.59 trillion through a 30-day operation. The move comes as the RBI steps up efforts to contain the unusually large amount of cash available within the financial system.
The RBI had sought to withdraw ₹7 trillion through the 30-day auction. However, participation was considerably weaker than expected, with five traders attributing the limited response to technical glitches. A person familiar with the matter disputed that explanation, saying there had been no technical problems and that all bids were successfully processed through the RBI’s e-Kuber electronic auction platform. The person spoke anonymously because they were not authorised to discuss the matter with the media.
The RBI did not respond to an email requesting comment.
The sharp increase in liquidity has become a concern because a prolonged surplus could contribute to higher inflation and encourage stronger demand for financial assets. The central bank had indicated last month that interest-rate increases could become necessary as both inflation and economic growth strengthen.
The latest operations underline the scale of the liquidity challenge facing the RBI. India’s banking-system surplus stood at ₹11.6 trillion on September 6, equivalent to almost 4% of total banking-system deposits.
The surge followed India’s receipt of a larger-than-anticipated $136 billion through special one-off schemes designed to strengthen the country’s external balances. The inflows generated substantial additional liquidity in the financial system, prompting the central bank to step up its withdrawal operations.
So far, the RBI’s cumulative liquidity withdrawals have exceeded ₹8.5 trillion. However, the money absorbed through these operations will eventually return to the banking system when the transactions mature, meaning the central bank may need to continue using different tools to manage liquidity levels.
Market participants expect further action. A treasury official said that although the latest response had fallen short of expectations, the RBI could conduct another long-duration reverse repo operation later in the week. Reverse repos allow the central bank to absorb excess funds from banks for a specified period.
The RBI has previously conducted reverse repo operations ranging from overnight arrangements to auctions with tenors of up to 15 days. Longer-duration operations have generally attracted less demand because banks are more hesitant to lock away funds for extended periods.
IDFC First Bank expects the RBI to rely on a combination of measures to deal with the scale of excess liquidity. Gaura Sen Gupta, chief economist at IDFC First Bank, said a combination of Market Stabilisation Scheme (MSS) bonds and sell-buy swaps could be the preferred approach.
According to Sen Gupta, these instruments would be among the least disruptive options available to the central bank, although each comes with its own challenges.
The RBI’s response will therefore remain closely watched by financial markets as policymakers balance the need to remove excess liquidity against the possibility of creating disruptions in money markets. The central bank’s recent operations also highlight the difficulty of absorbing the unusually large inflows without causing excessive volatility.
With banking-system liquidity still at an exceptionally high level, market participants are now looking for signals on whether the RBI will expand the use of longer-term reverse repos or turn to other instruments. The eventual return of funds as existing operations mature will also remain an important consideration for policymakers as they seek to keep liquidity conditions aligned with inflation and growth objectives.
