The RBI has already announced OMO sales worth Rs 1 trillion for September, involving government securities maturing between 2029-30 and 2031-32. The central bank has also withdrawn Rs 4.5 trillion through longer-tenor variable rate reverse repo (VRRR) operations with maturities ranging from 15 to 30 days.
“The economy might take up till Q2FY28 to absorb the durable excess liquidity, estimated at Rs 4 trillion. Around Rs 1 trillion is likely to be withdrawn through OMO sales, leaving Rs 3 trillion to be absorbed through other durable liquidity tools,” IDFC First Bank said in a report.
The build-up in liquidity followed large foreign currency non-resident (FCNR-B) inflows after the RBI’s dollar-rupee swap window. While much of the excess liquidity is expected to be temporary and absorbed through VRRR operations, the more durable portion is estimated at around Rs 4 trillion and could persist beyond March 2027.
Economists expect the RBI to use a combination of OMO sales and sell-buy swaps to deal with the surplus. The central bank has already undertaken short-term sell-buy swaps, with the impact visible in higher forward premiums. Longer-tenor swaps could also be considered. However, it would be difficult for the RBI to absorb the entire Rs 4 trillion through OMO sales and sell-buy swaps alone. OMO sales could add to pressure in the government bond market, which is already facing adverse demand-supply dynamics, while larger sell-buy swaps could push up forward premiums.
The other options available to the RBI include a hike in the cash reserve ratio (CRR) or the use of Market Stabilisation Scheme (MSS) securities. However, both have limitations. FCNR-B deposits are exempt from CRR, making a CRR hike less effective as a tool to absorb the current surplus. With OMO sales already under way, the likelihood of using MSS may also be lower as it would add to supply pressure in the fixed-income market, the report said.
IDFC First Bank estimates that OMO sales are unlikely to exceed Rs 1 trillion, given the prevailing conditions in the government bond market. Sell-buy swaps could potentially absorb another Rs 1 trillion, leaving around Rs 2 trillion to be withdrawn through MSS or a CRR hike.
The IDFC First Bank report said aggressive withdrawal could create a deep liquidity deficit in the third and fourth quarters, when seasonal demand for credit and cash tends to rise. This makes a calibrated approach to liquidity management important as the surplus gradually gets absorbed.
SBI Research, meanwhile, has characterised the current liquidity bulge as largely short-term, with the surplus expected to taper as the festive season approaches. It expects a sizeable portion to be absorbed over the next three to four months through tax outflows, GST payments, committed loan disbursals and stronger credit demand.
The SBI report estimates that advance tax and GST outflows alone, at around Rs 4.5-5 trillion, could absorb a sizeable part of the surplus. Rising corporate demand for capacity expansion and the onset of the festive season could further support credit demand and draw down banking-system liquidity. “The liquidity bulge is short-term in nature and should be absorbed in 3/4 months,” SBI Research said in a report.
 "RBI, Reserve Bank of India")