Banking system liquidity surplus hits new record of ₹10.3 trillion

The liquidity surplus in the banking system hit a record of ₹10.3 trillion on Thursday, according to the latest data by the Reserve Bank of India. 

The strong inflows, on the back of the central bank’s swap scheme, have resulted in a surge in banking system liquidity, which weighed on the overnight money market rates. 

The overnight weighted average call rate (WACR) – operating target of the monetary policy – fell below the standing deposit facility (SDF) rate to settle at 4.94 per cent against the previous close of 4.95 per cent.

The SDF rate, which currently stands at 5 per cent, is the interest rate at which banks park their surplus funds with the RBI without providing collateral. It forms the lower bound of the RBI’s policy corridor with the repo rate in the middle and the marginal standing facility (MSF) rate at the upper bound.

“The liquidity is expected to go further up from here toward ₹12 trillion, and the WACR will slip further lower toward 4.85 per cent,” said a money market dealer at a state-owned bank.

Consequently, the central bank conducted two 3-day Variable Rate Reserve Repo (VRRR) auction on Friday worth ₹8.5 trillion. Banks parked ₹6.02 trillion against the notified amount at a weighted average rate of 5.24 per cent.

Experts said that the liquidity surplus could exceed 1.5 per cent of NDTL (net demand and time liabilities ) by March, around 1 percentage point above the levels seen under the RBI’s neutral stance since October 2024, suggesting the central bank may need to take steps to moderate the surplus.

Before the swap scheme, average system and durable liquidity in May 2026 stood at ₹1.6 trillion (0.6 per cent of NDTL) and ₹3.8 trillion (1.4 per cent of NDTL), respectively. Average system liquidity has since increased to ₹3.7 trillion (1.3 per cent of NDTL) in August.

The liquidity surge may lead to a rise in inflation, firming a case for repo rate hike in the near future, said experts.

“Today’s liquidity can drive ‘future’ inflation higher as seen historically. Liquidity and headline and core inflation show a strong relationship with a 12-month lag. With inflation estimated at around 4.5 per cent in the financial year 2028 (FY28), the real policy rate turns out to be 0.8 per cent at the current repo rate, which is lower than the neutral rate band of 1.4-1.9 per cent. Hence, a repo rate increase of 50-75 basis points (depending upon inflation) should drive real rates into neutral territory,” a report by ICICI Bank said.