The Reserve Bank of India’s month-long Variable Rate Reverse Repo auction drew limited participation, suggesting banks were reluctant to commit surplus funds for that period. Both the cut-off rate and the weighted average rate for accepted bids stood at 5.24 per cent. VRRR auctions allow RBI to absorb excess cash from banks.

The report links the large liquidity surplus to foreign currency inflows under special measures, particularly the Foreign Currency Non-Resident Bank, or FCNR(B), deposit scheme. Banks exchanged these foreign currency funds for rupees with RBI, adding cash to the domestic banking system.

By the end of August, the special measures had attracted USD 136.38 billion, with FCNR(B) deposits accounting for USD 127.23 billion. Following the strong inflows, RBI shut the FCNR(B) window on August 31, one month ahead of schedule. Other channels, including External Commercial Borrowings, remain available until December 31, leaving scope for further inflows.

After the muted response, RBI announced an overnight VRRR operation worth Rs 5 lakh crore. Its aim is to keep market rates close to the repo rate and prevent surplus cash from weakening monetary policy transmission. Across August and September, RBI conducted 32 VRRR auctions covering different tenures.