The sharp decline in liquidity surplus in the banking system amid advance tax instalments and monthly GST payments prompted the Reserve Bank of India to conduct two variable rate repo (VRR) auctions on Wednesday.

The central bank conducted two 2-day VRR auctions to infuse liquidity amounting to ₹72,300 crore into the banking system at a weighted average rate of 5.26 per cent.

The banking system’s liquidity surplus shrank to ₹23,881 crore as on June 16 from ₹1.61,636 crore on June 15, per latest RBI data.

Amit Somani, Deputy Head-Fixed Income, Tata AMC, noted that over the last three to six months, banking system liquidity has fluctuated tightly between 0.5 per cent and 1 per cent of the NDTL (net demand and time liabilities).

He noted that strong credit growth, which is outpacing deposit growth, has strained system liquidity, prompting the RBI to actively intervene via Open Market Operations (OMOs) and forex swaps.

“This structural tightness caused short-term bond yields and money market rates to flare up significantly, driving 1-year and 2-year instrument yields to highly attractive levels — trading roughly 200 to 250 basis points above the underlying repo rate.

“The recent movements in yields already indicate that liquidity conditions have eased, with short-term yields declining more sharply than long-end yields,” he said.

Somani emphasised that the RBI’s special FCNR(B) swap facility is likely to have a favourable impact on domestic liquidity conditions and financial markets.

“By absorbing the currency hedging cost, the central bank is incentivising banks to mobilise fresh foreign currency deposits from NRIs, which could potentially bring in sizeable dollar inflows.

“As banks swap these inflows with the RBI, corresponding rupee liquidity will be injected into the banking system. This should help maintain adequate systemic liquidity, keeping short-term money market rates and bond yields well anchored,” he said.

Published on June 17, 2026