Surplus liquidity in India’s banking system hits ₹6.65 trillion, the highest since April 2022, driven by robust Foreign Currency Non-Resident (Bank) deposit inflows, prompting the RBI to adjust its liquidity management strategies.
Surplus liquidity in India’s banking system climbed to ₹6.65 trillion on Monday, the highest level since 19 April 2022, according to Reserve Bank of India data, as heavy inflows from the Foreign Currency Non-Resident (Bank) swap scheme continued to swell rupee balances. The flood of funds has left the central bank managing an unusually ample cash pile at a time when it is trying to keep short-term interest rates close to its policy corridor.
To drain some of that excess, the RBI on Monday ran two variable rate reverse repo auctions with a combined notified amount of ₹10 trillion. Banks placed ₹3.74 trillion in the operations, including ₹1.14 trillion in the seven-day auction and ₹2.59 trillion in the overnight window, both at a cut-off and weighted average rate of 5.24%. The central bank is also set to hold another overnight auction on Wednesday for ₹5 trillion, Reuters reported.
Market participants said the demand was restrained because liquidity is not spread evenly through the system. Large lenders have benefited most from the FCNR(B) mobilisation, while many mid-sized and smaller banks have not seen the same inflows. A treasury head at a state-owned bank told Business Standard that overnight rates were already around 5.20% and that the RBI’s 5.24% offer did not leave much incentive for banks to lock away funds for longer.
The weighted average call rate, the RBI’s operating target for monetary policy, eased to 5.16% from 5.18% the previous day. By 21 August, banks had raised $65.4 billion through FCNR(B) deposits, with the dollars swapped into rupees with the RBI, adding sharply to domestic liquidity. Moneycontrol reported that the surge has also reduced banks’ need for certificates of deposit, which fell to a four-month low in August. In currency markets, the rupee strengthened to a two-month high of 94.95 per dollar, supported by solid domestic growth data and dollar sales by the central bank, although analysts warned that geopolitical tensions and higher crude prices could still trigger sharp swings.
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