The Reserve Bank of India will conduct a 29-day Variable Rate Reverse Repo auction for Rs 2 lakh crore on October 8 as it continues to manage surplus liquidity in the banking system.

Earlier in the day, the RBI absorbed Rs 2.56 lakh crore through an overnight VRRR auction against a notified Rs 3 lakh crore, at a cut-off rate of 5.49 per cent.

Banking system liquidity is estimated to be in surplus of around Rs 5.16 lakh crore as of October 4, according to RBI data. The surplus stems from heavy mobilisation of FCNR(B) deposits and month-end government spending on salaries and pensions.

Governor Sanjay Malhotra said the surplus was unlikely to persist for long. ‘There is surplus liquidity, but we believe that this is not a very long term phenomenon,’ he said at the post-policy press conference.

A trader said festive-season cash demand and the RBI’s forward book of over $100 billion could drain Rs 2-3 lakh crore by January. The central bank has used VRRR auctions for two months to align overnight rates with the repo rate.