India’s banking sector ended August with a significant cash surplus of about Rs 5.05 lakh crore, driven by foreign currency deposit inflows and government expenditures, prompting RBI to use monetary tools to manage liquidity levels.
India’s banking system ended August with a far larger cash surplus than it had seen for months, with excess liquidity climbing to about Rs 5.05 lakh crore on August 30, according to data compiled by PTI from the Reserve Bank of India. That was the highest level since April 15, when the surplus stood at Rs 5.22 lakh crore.
The increase was driven mainly by foreign currency non-resident, or FCNR(B), deposit inflows and by month-end government spending, including salary and pension payments. Mataprasad Pandey, vice president at Choice Wealth, told PTI that net system liquidity had risen to around Rs 5 lakh crore as foreign exchange swaps linked to FCNR(B) deposits moved towards closure.
Banks had mobilised about $65.4 billion through the RBI’s special dollar-rupee swap window for FCNR(B) deposits by August 21. A note from HDFC Bank said total flows under the concessional swap facilities could ultimately reach $90 billion to $95 billion, translating into an estimated rupee liquidity injection of roughly Rs 8.5 lakh crore to Rs 9 lakh crore. The bank said the gap between that theoretical support and the cash actually sitting in the system reflected currency leakage, RBI intervention in foreign exchange markets and the maturity of part of the central bank’s short forward dollar book.
The RBI has responded by using variable rate reverse repo auctions to absorb surplus cash and keep overnight money-market rates near the policy repo rate. The central bank has already conducted 23 such auctions, with banks placing funds with it despite the excess liquidity still available in the system. HDFC Bank expects liquidity to stay elevated in the near term before easing to around Rs 4 lakh crore to Rs 4.5 lakh crore later in September and October, with another rise possible in November before balances begin falling towards the January-March quarter.
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