Persistent surplus liquidity can weaken monetary policy transmission. Examine with reference to the RBI's recent liquidity management measures.

The RBI signals its policy through the repo rate. Its operating target is the overnight Weighted Average Call Rate (WACR), kept within a corridor that runs from the SDF (repo − 25 bps) to the MSF (repo + 25 bps) [1]. When banks hold a large surplus, about ₹3.88 lakh crore on 8 October 2026 [2], WACR drifts away from the repo rate and the policy signal weakens.

How surplus liquidity weakens transmission

• WACR sinks to the floor: banks lend spare cash cheaply, so the call rate moves towards the SDF. In effect, the SDF rate replaces the repo rate as the working policy rate [1].
• Rate hikes are blunted: banks with plenty of cash feel little pressure to raise deposit or lending rates, so a tighter stance does not reach borrowers.
• Mixed signals: soft money-market rates (T-bills, CPs) run against the policy stance and confuse inflation expectations.
• Fiscal cost to the RBI: the RBI pays interest on every rupee it absorbs through the SDF or reverse repo auctions.

RBI's recent measures

• Revised Liquidity Management Framework (Sept 2025): kept WACR as the operating target and made 7-day VRR/VRRR auctions the main tool. It retained the 90% daily CRR minimum [1].
• Daily CRR minimum raised from 90% to 99% from 16 October 2026, after a review of liquidity conditions. The headline CRR rate is unchanged [2].
• Precedent: in July 2013 the RBI raised the daily minimum from 70% to 99% to tighten liquidity during exchange-market volatility [3].

Limitations

• Fortnightly averaging almost ends: a bank can now fall only 1% below its CRR on any day. Outflow shocks, such as advance-tax days, therefore hit the call market and may cause one-day rate spikes.
• Implicit tax: CRR balances earn no interest, and banks may pass the cost on to borrowers.
• Partial drain: the rule removes only day-to-day flexibility, not the whole surplus, so VRRR and OMO sales must still do most of the work [1].

Surplus liquidity breaks the link between the repo rate and market rates, and the RBI's measures aim to restore it. The 99% rule is best used as a temporary supplement to market-based VRRR auctions, clearly communicated and eased once the surplus returns to normal, as happened after 2013. That would keep the price-stability mandate credible without permanently burdening banks.