Banking liquidity surplus tops ₹5 tn; RBI drains ₹2 tn

Liquidity surplus stays elevated for multiple days

Surplus liquidity in India’s banking system stayed above ₹5 trillion for the fifth straight day, based on RBI data tracking funds parked under its liquidity adjustment facility (LAF). The surplus was reported at ₹5.25 trillion on Monday and ₹5.13 trillion on Tuesday. Market participants linked the elevated surplus to large inflows around the fiscal year-end, including government spending and the release of funds from bond redemptions. With banks carrying excess cash, overnight money-market rates softened relative to the policy rate. That gap matters because the RBI uses the overnight rate corridor to transmit monetary policy to broader financing conditions.

What the RBI data shows on overnight rates

The weighted average call rate (WACR), the operating target of monetary policy, was 5.08% on Wednesday versus 5.04% on the previous day. The policy repo rate stands at 5.25%, leaving the WACR below the policy rate during the period of high surplus. Market participants have been watching whether the RBI steps up liquidity absorption tools when overnight rates move away from the repo. In its Monetary Policy Report, the RBI noted that keeping liquidity surplus in a 0.6% to 1.1% band of deposits would likely keep the WACR-policy spread at 5 to 10 basis points.

Drivers: government spending and G-Sec redemptions

Traders and treasury executives pointed to inflows of around ₹3 trillion, supported by year-end government spending and government security redemptions, as key reasons the surplus moved beyond ₹5 trillion. Redemptions cited in the data flow included ₹0.864 trillion and ₹0.348 trillion, alongside another maturity of ₹0.313 trillion. VRC Reddy, treasury head at Karur Vysya Bank, said government spending of around ₹3.5 trillion, including about ₹1.2 trillion in the form of security redemption, and some decrease in cash in circulation widened the surplus. Separately, the liquidity in the banking system was described as turning into a “huge surplus” on the back of G-Sec maturities.

RBI flags proactive liquidity management

After the monetary policy review earlier in the week, RBI Governor Sanjay Malhotra reiterated the central bank’s stance on liquidity operations. He said the RBI would continue to be “proactive and pre-emptive” in liquidity management and ensure sufficient liquidity to meet the productive requirements of the economy. The policy backdrop includes the MPC decision on April 8 to maintain the repo rate at 5.25% and highlight increased uncertainty linked to the West Asia conflict. Against that setting, the RBI’s focus has been on keeping overnight rates aligned with the policy signal while managing transient liquidity swings.

₹2 trillion VRRR: the RBI’s cash withdrawal step

As surplus liquidity remained elevated, the RBI announced a seven-day variable rate reverse repo (VRRR) auction to absorb up to ₹2 trillion on April 10, 2026. Reuters reported the move as a cash withdrawal operation intended to remove excessive liquidity from the system. The same day, reports described it as the first such liquidity absorption since December, aimed at realigning overnight rates with the policy rate. The size of the auction is significant relative to the surplus measures circulating in the market, even though it does not fully absorb the total excess.

Where system liquidity stood around April 9-10

Multiple readings were cited across reports as the surplus evolved through the week. Banking system liquidity surplus was around ₹4.5 trillion as of Thursday, or about 1.8% of deposits. RBI data also pointed to an expected surplus of around ₹4.55 trillion as of April 9. A Bloomberg Economics gauge put surplus cash with banks at ₹4.3 trillion as of Thursday. The differences reflect timing and the specific measures used, but the common message was that liquidity remained well above the RBI’s stated comfort zone of 0.6% to 1.1%.

Bond market reaction and what dealers said

India’s sovereign bond yields rose after the RBI announced plans to withdraw liquidity via the seven-day VRRR. The 10-year benchmark yield rose as much as 4 basis points to 7% following the announcement. Gopal Tripathi, head of treasury at Jana Small Finance Bank, said the auction would suck out excess funds as overnight rates were falling well below the policy rate due to extreme liquidity overhang. He added that banks could still be left with surplus cash of about ₹1.5 trillion to ₹2 trillion after the operation. Puneet Pal, head of fixed income at PGIM Asset Management in Mumbai, said there could be some uptick in yields at the shorter end.

Key numbers at a glance

Why the spread to the repo rate matters

When WACR stays below the repo rate, it can weaken the intended transmission of the policy stance, particularly for very short-term borrowing costs. That is why market participants expected the RBI to step up VRRR operations to absorb surplus liquidity when the gap persisted. The Monetary Policy Report’s guidance around the desired surplus band and the expected 5 to 10 basis point spread provided an explicit benchmark for market expectations. With liquidity readings ranging from about ₹4.3 trillion to above ₹5 trillion in the same period, the decision to conduct a ₹2 trillion VRRR signaled a focus on fine-tuning rather than a shift in the headline policy rate.

Conclusion

The banking system’s liquidity surplus stayed unusually high, crossing ₹5 trillion for five consecutive days before easing to around ₹4.5 trillion in subsequent readings. With overnight rates running below the 5.25% repo rate, the RBI moved to absorb liquidity through a ₹2 trillion, seven-day VRRR auction on April 10, 2026. The next cues for markets will come from how quickly surplus liquidity normalises as government cash flows and scheduled bond maturities pass through the system, and from any follow-up RBI liquidity operations aimed at keeping WACR close to the policy rate.