The Reserve Bank of India (RBI) has conducted two massive Variable Rate Reverse Repo (VRRR) auctions to soak up excess funds. In total, the RBI absorbed over ₹6.02 lakh crore from banks on a single Friday. VRRR is a tool where the RBI takes money from banks for a few days and gives them interest in return. This helps the RBI control how much cash is floating in the market.

In the first auction, the RBI offered to take ₹7 lakh crore for three days. Banks submitted bids worth ₹5,41,975 crore, and the RBI accepted all of them at a cut-off rate of 5.24 per cent. In a second smaller auction, the RBI wanted to take ₹1.5 lakh crore, but banks parked ₹60,419 crore. These operations show that the banking system is currently flooded with more cash than it actually needs.

Why is there so much money in the system? The main reason is huge inflows from the special Foreign Currency Non-Resident (FCNR(B)) deposit scheme. This scheme allows NRIs to keep money in Indian banks in foreign currency. These deposits brought in $136.38 billion by the end of August. When banks swapped this foreign money for Indian Rupees with the RBI, the amount of Rupees in the system grew significantly.

Government spending has also played a part. At the end of the month, the government releases money for salaries and pensions. This cash ends up in bank accounts, further increasing the surplus. As of September 3, the total surplus liquidity (extra cash) in the banking system was estimated at a record high of ₹10.32 lakh crore.

For bank officers, this extra cash is a double-edged sword. While banks have plenty of money to lend, the high surplus is pulling down short-term interest rates. The weighted average call money rate (the rate at which banks lend to each other for one day) fell to 4.93 per cent. This is 0.32 per cent lower than the official policy rate, which is not what the RBI wants.

To keep market rates close to the official Repo Rate, the RBI has been very active. They have conducted 32 VRRR auctions since August. These auctions have different timelines, ranging from just one night (overnight) to two weeks (14 days). The goal is to make sure there isn't too much cheap money available, which could cause other economic issues.

Looking ahead, bankers should watch the ECB (External Commercial Borrowing) and OFCB (Overseas Foreign Currency Borrowing) routes. While the FCNR(B) window was closed early due to high demand, these other routes remain open until December 31. If more money flows in through these channels, the RBI will likely continue its aggressive VRRR auctions to keep the system balanced.