RBI manages ₹5 lakh crore liquidity surge in Indian banking system

The Indian banking system is experiencing a significant surge in liquidity, with surplus cash exceeding ₹5 lakh crore as of late August 2026. This represents the highest liquidity level since mid-April.

This influx is primarily attributed to the Foreign Currency Non-Resident (Bank) deposit (FCNR(B)) swap facility. Through this facility, banks raised approximately $65.4 billion by August 21, which was subsequently swapped with the Reserve Bank of India (RBI) for rupees, substantially increasing domestic currency availability. Additionally, heavy government spending on salaries and pensions toward the end of the month contributed to the cash surplus.

In response to this excess liquidity, the RBI has been conducting Variable Rate Reverse Repo (VRRR) auctions to absorb funds and manage overnight rates. However, recent VRRR auctions have seen relatively weak demand; banks deposited only ₹3.84 lakh crore against a notified amount of ₹10 lakh crore. While large banks participated, many small and medium-sized banks showed less interest, leading to an imbalance in liquidity across the banking sector.