India’s banking system is experiencing a record Rs 11 lakh crore surplus, prompting the Reserve Bank of India to deploy a series of liquidity tools to prevent short-term borrowing costs from falling below policy rates and to maintain financial stability amid prolific foreign-currency inflows.
India’s banking system is sitting on a cash surplus of more than Rs 11 lakh crore, and the Reserve Bank of India is trying to stop that flood of money from dragging short-term borrowing costs too far below its policy rate. The glut has been fuelled by banks’ mobilisation of about $136.4 billion through foreign-currency deposit schemes, according to reporting by the Economic Times and Financial Express.
To drain the excess, the RBI has already absorbed more than Rs 4.6 lakh crore through 30-day variable-rate reverse repo operations, while overnight repos and standing deposit facility placements have taken out another Rs 6.6 lakh crore, the Economic Times reported. Financial Express said the central bank has also used dollar-rupee buy-sell swaps, a move that removes dollars from the spot market and delivers them back later, easing immediate demand for dollars while nudging up the currency’s forward premium.
The scale of the surplus has forced the RBI to use several liquidity tools at once. Financial Express said the central bank is weighing further measures, including incremental cash reserve ratio requirements and foreign-exchange forward maturities, if needed to soak up the cash. In its recent actions, the RBI has also signalled that it does not want overnight money-market rates to fall too far beneath the policy corridor, a condition that could complicate monetary policy transmission.
Market watchers say the abundance of liquidity could sharpen competition among banks for top-rated corporate borrowers, potentially improving loan pricing for stronger companies, according to Moneycontrol. At the same time, the RBI’s intervention is aimed at limiting inflationary pressure and preserving financial stability as the banking system absorbs the effects of large foreign-currency inflows.
Disclaimer: This article is intended to inform and educate, not to recommend or endorse any financial product, investment or strategy. Please consider your own financial circumstances and seek professional advice where appropriate before making financial decisions.
