RBI poised to raise rates while managing excess liquidity

The RBI is anticipated to announce a 25-basis-point increase in its repo rate at its forthcoming monetary policy meeting, marking the next step in its rate-hiking cycle aimed at controlling inflation. The move comes as the central bank confronts a substantial core liquidity surplus that continues to test its capacity to sterilise excess funds from the financial system.

With the surplus hovering around ₹10 trillion, the RBI has intensified its focus on liquidity absorption operations, deploying tools such as variable rate reverse repo auctions and other open market instruments to mop up excess cash. These operations are critical to ensuring that monetary policy transmission occurs effectively and that the central bank's intended policy rates translate into actual lending rates across the economy.

Market participants are closely watching how the RBI will balance its dual mandate of rate normalisation and liquidity management. The persistence of high surplus liquidity suggests that despite recent absorption efforts, structural factors continue to push cash into the banking system, requiring sustained and coordinated interventions from the central bank.

Analysts expect the RBI to maintain its hawkish stance in the near term, with continued focus on both rate adjustments and active liquidity drainage through its regular market operations. The central bank's management of these twin challenges will remain pivotal in determining the trajectory of interest rates and credit conditions in the Indian economy.