RBI Drains $10 Billion from Banking System to Lift Short-Term Rates

Mumbai: The Reserve Bank of India (RBI) has withdrawn ₹849.75 billion ($10 billion) from the banking system through a 7-day variable rate reverse repo auction — its first liquidity-absorbing operation in seven months — in an effort to align overnight borrowing costs with the policy rate.

The auction, conducted on Friday, saw a cutoff yield of 5.49%, just below the RBI’s current policy repo rate of 5.5%. The central bank had originally planned to absorb ₹1 trillion.

This move comes as the RBI seeks to curb excess liquidity that has pushed overnight money market rates below the policy rate for several months. Since January, the RBI has injected over ₹9.5 trillion into the banking system, contributing to a persistent liquidity surplus.

“Liquidity will still remain in surplus even after this operation,” said Ritesh Bhusari, Joint General Manager for Treasury at South Indian Bank. “The RBI is likely to maintain liquidity at around 1.5% to 2% of net deposits. If it exceeds that range, further operations could follow.”

Following the announcement, short-term borrowing costs ticked upward. The yield on the 7.02% 2027 bond rose one basis point to 5.80%, while the benchmark 10-year bond yield increased similarly to 6.29%.

According to Bloomberg Economics’ Liquidity Index, the banking system had a liquidity surplus of approximately ₹2.5 trillion as of June 26.

The RBI’s latest action signals a calibrated tightening approach to ensure money market rates better reflect its monetary policy stance, without disrupting the broader liquidity framework.