How Does the RBI Manage Banking Liquidity, and Why Did It Swing From Surplus to Deficit?

Liquidity is the cash banks hold beyond what they need to settle daily payments. When banks have more than they need, the system is in surplus and they park the excess with the RBI; when they have less, it is in deficit and they borrow from the RBI. The RBI tracks this through the net position under its liquidity adjustment facility (LAF). Its aim is to keep the weighted average call rate (WACR), the overnight rate at which banks lend to each other, close to the policy repo rate. That is how a rate decision in Mumbai reaches the loans and deposits offered at a branch.

After the 7 October hike, three RBI rates form a corridor. The WACR, the RBI’s operating target, is meant to trade inside it.

The RBI mixes temporary tools, which reverse within days, with tools that change liquidity for longer.

• Surplus: Capital-inflow measures, including the FCNR(B) swap, pushed liquidity up. The RBI’s average daily net absorption rose from ₹1.2 lakh crore in July to ₹5.8 lakh crore in August and ₹7.8 lakh crore in September.

• Drain: Between the August and October policies the RBI held 55 VRRR auctions and sold ₹1 trillion of bonds. After the 7 October hike it tightened daily CRR maintenance and sold a further ₹25,000 crore.

• Flip: The surplus fell from ₹4.87 lakh crore on 30 September to ₹542 crore on 21 October, as GST payments, festive currency demand and falling reserves drained cash.

• Injection: On 19 October the RBI resumed VRR auctions, lending ₹1 trillion at 5.52%. On 23 October it lent ₹50,003 crore for three days at a cut-off of 5.58%, against bids of ₹1.07 lakh crore. The WACR reached 5.78% that day, above the 5.75% ceiling, and the Governor said liquidity is in deficit for now.

• Rate transmission: With surplus cash, the WACR traded about 14 bps below the repo rate after August, which blunts a hike. Tighter liquidity pulls it back up.

• Bond market: OMO sales add bond supply in a market where the 10-year yield touched about 7.45% on 21 October, its highest since March 2023.

• Banks: A senior banker at a state-owned bank said the CRR change has limited impact, as banks usually hold over 95% of the requirement.

• Rupee link: Selling dollars to defend the rupee also removes rupees from the system. A Jana Small Finance Bank treasury head tied the fall in liquidity to the fall in reserves.

• Policy signal: An STCI Primary Dealer economist said a deficit with the WACR above the repo is consistent with “calibrated tightening,” although the Governor says the aim remains alignment.

• “The RBI raised the CRR to 99%.” It raised the daily minimum maintenance to 99% of the requirement; the ratio stays at 3%. Daily maintenance was last this high in July 2013.

• “A liquidity deficit means banks are short of money.” It means banks borrow net from the RBI through auctions, a routine operation; the RBI also ran VRR auctions as recently as 29 July.

• “OMOs and repo auctions do the same thing.” Repo and reverse repo auctions are temporary and unwind at maturity; OMOs change liquidity for longer.

Ans. Banking liquidity is the cash banks hold beyond what they need to settle daily payments. When banks hold more than they need, the system is in surplus and they park the excess with the RBI. When they hold less, it is in deficit and they borrow from the RBI.

Ans. The RBI manages liquidity with temporary tools such as VRR and VRRR auctions, and longer-lasting ones such as open market operations, the cash reserve ratio and forex operations. Its aim is to keep the weighted average call rate close to the policy repo rate.

Ans. Liquidity swung to deficit because the RBI drained cash while other drains built up. Between the August and October policies it ran 55 VRRR auctions and sold ₹1 trillion of bonds, while GST payments, festive currency demand and falling forex reserves also pulled cash out of the system.

Ans. No, the RBI did not raise the CRR to 99%. It raised the daily minimum maintenance to 99% of the requirement from 16 October, up from 90%, while the CRR itself stays at 3% of deposits. Daily maintenance was last this high in July 2013.

Ans. The weighted average call rate (WACR) is the overnight rate at which banks lend to each other. The RBI treats it as its operating target and tries to keep it near the repo rate, because that is how a policy rate decision reaches loan and deposit rates.