Core liquidity surplus is still around ₹10 trillion, a large part of it in the form of government cash surplus, and could continue to keep overnight rates below the repo rate.
The three-day review of the October monetary policy is currently underway, with the outcome due on Wednesday. The rate-setting panel is widely expected to raise the policy repo rate by 25 basis points. After cutting the repo rate by 125 basis points in 2025, the RBI maintained the status quo in the last four meetings.
The WACR, the operating target of monetary policy, closed at 5.09 per cent on Monday, against 4.94 per cent in the previous session. Net liquidity in the banking system was in a surplus of ₹5.15 trillion on Sunday, latest RBI data showed.
“Although durable liquidity has been withdrawn through OMO sales and FX operations, core liquidity surplus remains high at ₹10 trillion, a large part of which is in the form of government cash surplus,” said a report by IDFC First Bank.
Strong currency outflows and a likely negative balance of payments in the second half of FY27 are expected to drain much of the surplus. The combination of higher currency leakage, pressure on the external balance and elevated government cash balances is expected to bring the system liquidity surplus down to around 0.4 per cent of net demand and time liabilities by March 2027, market participants said.
This would reduce the need for further durable liquidity withdrawal over the medium term, with the RBI likely to increasingly use temporary tools to manage surplus liquidity. Shorter-tenor sell-buy swaps and variable rate reverse repo (VRRR) operations are likely to be among the tools used to absorb liquidity, they said.
However, greater reliance on sell-buy swaps could have implications for capital flows. The rise in forward premiums following such operations could make currency hedging more expensive for foreign investors and weigh on debt inflows, they said.
Despite the expected organic drainage of liquidity, the RBI could still resort to further OMO sales in the near term if the core surplus remains elevated and puts downward pressure on overnight rates, market participants said.
“The rate hike is shallow and already priced in. What will move overnight rates is how the RBI manages liquidity after the hike, in what order it uses OMO sales, VRRR and swaps over the next two quarters,” said the treasury head at a private bank.
The central bank conducted open market operation (OMO) bond sales in September to mop up ₹1 trillion, which helped bring the WACR in line with the repo rate, albeit for only a few days.
 "Reserve Bank of India, RBI")