The Reserve Bank of India absorbed more than ₹6 lakh crore of surplus banking-system liquidity through variable-rate reverse repo operations on September 7, according to Reuters. Banks placed about ₹3.53 lakh crore in an overnight operation and around ₹2.59 lakh crore in a 30-day operation. The action followed an exceptional build-up of surplus rupee liquidity associated with large foreign-currency inflows.
A variable-rate reverse repo is a liquidity-absorption operation. Banks place funds with the RBI for a specified tenor and bid for the interest rate, temporarily removing money from the banking system. It is different from a variable-rate repo, through which the RBI injects liquidity. The broader objective is to keep short-term money-market rates aligned with the monetary-policy stance rather than allowing excess cash to push them persistently away from the operating target.
Why does this matter? Too much durable liquidity can weaken monetary transmission, distort short-term rates and, if left unchecked, add to inflationary or asset-price pressures. The RBI has several tools available depending on whether the liquidity is temporary or durable, including VRRRs, foreign-exchange swaps, open-market operations and the Market Stabilisation Scheme.