Impact of RBI's recent liquidity absorption on money market rates

In a statement released on September 18, the Reserve Bank of India disclosed that its latest Variable Rate Reverse Repo (VRRR) auction pulled ₹2.23 lakh crore out of the system. By doing so, the RBI aims to align short‑term money‑market rates with the repo rate, which remains the key benchmark for monetary policy.

The auction achieved a bid total of ₹2,22,629 crore against a target of ₹2.25 lakh crore, with a weighted average acceptance rate of 5.24 per cent. This mirrors the rate applied in a previous VRRR operation that absorbed ₹3.93 lakh crore earlier in the week.

Excess liquidity in the banking sector fell to about ₹6.94 lakh crore as of September 17, a sizable drop from the ₹10.73 lakh crore reported on September 11. The decline underscores the effectiveness of combined VRRR auctions and an open market operation (OMO) where the RBI sold ₹50,000 crore of sovereign bonds.

The central bank has also scheduled two further OMO sales of ₹25,000 crore each on September 21 and September 28. These sales are expected to reinforce the downward pressure on overnight funds rates, keeping them close to the policy repo rate and supporting the RBI’s broader goal of financial stability.