Money Market Operations as on August 25, 2026

On August 25, 2026, the Reserve Bank of India (RBI) conducted a significant liquidity management operation that offers a window into the functioning of India's monetary policy framework. The central bank absorbed ₹98,516 crore through a 2-day Variable Rate Reverse Repo (VRRR) auction at a cut-off rate of 5.24%, maturing on August 27, 2026. Simultaneously, the Standing Deposit Facility (SDF) absorbed a massive ₹1,96,260 crore in 1-day operations and ₹870 crore in 2-day operations at 5.00%, while the Marginal Standing Facility (MSF) saw limited borrowing of ₹272 crore (1-day) and ₹12 crore (2-day) at 5.50%. These operations reflect the RBI's active management of surplus liquidity in the banking system under the Liquidity Adjustment Facility (LAF) framework. The LAF, introduced in June 2000 based on the recommendations of the Narasimham Committee on Banking Sector Reforms (1998), serves as the primary instrument for day-to-day liquidity management. It operates through repo (injecting liquidity) and reverse repo (absorbing liquidity) operations, with the SDF and MSF acting as the floor and ceiling of the interest rate corridor respectively. The SDF, introduced in April 2022 replacing the fixed-rate reverse repo, allows banks to deposit surplus funds with RBI without collateral, while MSF enables banks to borrow overnight against government securities up to 2% of their Net Demand and Time Liabilities (NDTL) at a penal rate. The weighted average call money rate (WACR) at 5.18% and triparty repo rate at 5.01% indicate that the operating target — the weighted average call rate — remains well within the policy corridor (SDF at 5.00%, MSF at 5.50%), suggesting effective monetary transmission. The dominance of Triparty Repo (₹4.78 lakh crore) in the overnight segment highlights the structural shift from unsecured call money to collateralised repo markets, driven by regulatory reforms post-2008 and the introduction of the Clearing Corporation of India Ltd (CCIL) as a central counterparty. This transition enhances financial stability by reducing counterparty risk. The Call Money market, now largely restricted to non-bank participants like primary dealers and mutual funds, recorded ₹14,101 crore volume at 5.18%, reflecting its diminished but still relevant role. Constitutionally, the RBI derives its monetary authority from the RBI Act, 1934 (Section 45ZB empowers the Monetary Policy Committee), while the Banking Regulation Act, 1949 governs banking operations. The MPC, constituted under the 2016 amendment to the RBI Act, targets inflation at 4% (±2%) under the flexible inflation targeting framework — a landmark shift from multiple indicator approach to rule-based policy. The current operations reflect the 'withdrawal of accommodation' stance adopted post-COVID, as the RBI normalises liquidity after pandemic-era surplus. For India's economy, effective liquidity management ensures stable short-term rates, supports credit flow to productive sectors, and anchors inflation expectations. The large SDF absorption indicates persistent surplus liquidity — a legacy of fiscal stimulus, forex inflows, and RBI's open market operations. Going forward, as government spending picks up and currency demand rises, liquidity may tighten, prompting a shift from VRRR to repo operations. Aspirants must track the interplay between fiscal deficit (Article 112, Union Budget), RBI's balance sheet, and external flows — all critical for UPSC GS-III, RBI Grade B, and banking exams.