The surplus moderated primarily due to quarterly advance tax outflows, where about ₹2 lakh crore exited the banking system ahead of the March 15 deadline.
Average system liquidity stood at ₹2.43 lakh crore in the previous week.
Liquidity also came under pressure after central bank interventions in the foreign exchange market, with the rupee sliding about 1.5% since the start of the US-Israeli offensive on Iran.
Economists estimate that the Reserve Bank of India (RBI) has likely sold more than $15 billion from its stockpile over the past couple of weeks.
On Tuesday, too, the overnight call rate stood at 5.27%, suggesting tight liquidity. To counter this, RBI conducted a 7-day variable rate repo (VRR) operation to induce ₹1.5 lakh crore. However, it received bids for just ₹48,014 crore.
“We have durable liquidity of above ₹5 lakh crore, so that means there is money with the government, and people expect this to come back into the banking system by next week. The institutions that would have borrowed in Tuesday’s VRR would have been the ones that really needed funds for day-to-day operations,” said Alok Singh, head of treasury, CSB Bank. RBI had likely anticipated the moderation in surplus liquidity in the banking system and accordingly conducted open market operations (OMOs) worth ₹1 lakh crore last week.