“Why Is the RBI Removing ₹6 Lakh Crore From the Banking System?”

Suddenly RBI has taken a decision to absorb a hefty sum of money, which is excessive in the Indian banking system. On 4th September 2026, the absorption value was ₹6.02 lakh crore through variable rate reverse repo auction. This condition only takes place when there is sufficient liquidity or surplus in the banking system. In this situation, there was almost a ₹10.3 lakh crore surplus amount in the Indian banking system.

Is there a significant concern that it will disappear from the Indian economy? The answer is no. 

What Is Banking-System Liquidity?

Generally, liquidity indicates the amount of money easily available to withdraw from banks or financial institutions. In the banking system, banks need to maintain liquidity to manage regular financial transactions.

Why Did Liquidity Become So High?

The reason behind the high liquidity is the inflow of foreign-currency deposits under the special FCNR(B) deposit scheme. Almost $127 billion in deposits of foreign dollars inflow due to foreign exchange. Consequently, the liquidity in the banking system increases.

Negative impact of excessive liquidity

1. Due to the availability of excessive funds, banks do not need to borrow from each other. Consequently, it reduces short-term interest rates and affects RBI’s policy for the banking system.
2. Excessive funds among banks can cause inflation pressure for the economy.

What Is VRRR or Variable Rate Reverse Repo?

In simple terms, the RBI gives an opportunity to banks to park the excess liquidity with a variable interest rate. Consequently, the RBI uses it as a weapon for absorbing excessive liquidity from the market to make the market stable in the short term.

Relevance in present situation

RBI has decided a 5.24% rate as a cut-off to absorb the money from the banking system and absorb the money to maintain inflation, interest rate and liquidity in the cash market.

Why Didn't the RBI Simply Leave the Money in the Banking System?

The aim of RBI is to maintain sufficient money which is required to maintain interest rate, inflation and flow of currency. Hence, excessive funding can disrupt the entire financial market and can cause various challenges in the long run.