RBI May Consider October Rate Hike as Banking System Liquidity Surges to Record ₹10.3 Lakh Crore

The Reserve Bank of India (RBI) may consider raising interest rates at its upcoming monetary policy review in October, as surplus liquidity in the banking system has climbed to a record level.
The central bank has announced a ₹7 lakh crore, 30-day Variable Rate Reverse Repo (VRRR) auction for Monday. The next Monetary Policy Committee (MPC) meeting is scheduled to be held from October 5 to 7.
Banking system liquidity reached a fresh high of ₹10.3 lakh crore on Thursday, up from ₹9.7 lakh crore a day earlier. The sharp rise has largely been attributed to the RBI’s special swap facility for Foreign Currency Non-Resident (FCNR-B) deposits, through which banks raised a record $127.2 billion. The facility closed on August 31.
The RBI has also introduced a new flexibility in Monday’s VRRR auction. Banks will be allowed to withdraw part of the funds deposited in the auction before the original withdrawal date. This is the first time such an option has been offered in a VRRR auction.

According to the RBI, banks can submit requests for premature withdrawal at least two working days before the scheduled withdrawal date.
Market participants believe the move could ease concerns in the bond market about further liquidity-tightening measures ahead of the October policy meeting. Dealers said the flexibility could also encourage banks to participate in the longer-duration VRRR auction despite upcoming month-end tax payments.
A private bank treasury official said the latest move could indicate that the RBI is unlikely to announce additional liquidity measures before the October policy review. With the rupee under pressure, bond yields remaining elevated and liquidity unevenly distributed across the banking system, the official said a rate hike could emerge as a possible policy option.

Another dealer said the partial withdrawal facility could make banks more comfortable locking funds for 30 days, as they would still have access to part of their money if liquidity requirements arise.
The RBI’s liquidity operations have also had an impact on India’s foreign exchange reserves. In the week ended August 28, the reserves rose to a record $740.8 billion. The reserves have increased by $73.9 billion over nine consecutive weeks, marking the longest run of gains since April-June 2021.
Foreign currency assets, the largest component of the reserves, increased by $9.34 billion during the week to reach $600 billion.