Bankers Park It Big: RBI’s Vault Swells as Lending Slows

The Reserve Bank of India's Standard Deposit Facility (SDF) recorded a record average quarter of Rs 2.6 lakh crore for the June 2025 quarter, the highest since it began operations in April 2022. This reflects a banking system that is liquidity-abundant but grappling with weak credit demand and risk-averse lending.

Highlights of the June Quarter

Surplus money was kept by banks with RBI due to weak loan growth, particularly in the unsecured segments

SDF balancing tripled year-over-year, with month-on-month averages rising 113% in April, 186% in May, and 340% in June

The current SDF rate is 5.25%, 25 basis points below the repo rate

Why Banks Are Stashing Funds

Credit expansion slowed to 9.5% in Q1 FY26 from nearly 16% in FY24

RBI's liquidity injections during January-March such as CRR reductions and forex operations generated a surplus

With little room for lending, the banks opted for the SDF route, which does not require collateral versus reverse repo

RBI Response to Excess Liquidity

To prevent overnight rates falling less than the repo rate, RBI conducted Variable Rate Reverse Repo (VRRR) auctions

Rs 3.5 lakh crore was mopped up in July alone by three VRRR tranches

In contrast to fixed-rate instruments, VRRR enables banks to bid for preferred rates, bestowing them with liquidity management flexibility

This liquidity lock-in underscores the RBI's fine balance between credit stimulation and money stability, given that banks look for stronger demand signals before lending more aggressively.

Sources: Economic Times, Bank of Baroda, ANZ Research, RBI Bulletin, Financial Express