India's banks are now swimming in cash, with banking liquidity surplus hitting a record Rs 9.71 lakh crore. This surge came mainly from the RBI's Foreign Currency Non-Resident Bank - FCNR-B deposits, which brought in $127.23 billion and was closed early due to its overwhelming success.
Key Highlights
- RBI's $127.23 billion FCNR-B inflows pushed banking liquidity surplus to a record Rs 9.71 lakh crore in September.
- RBI conducted VRRR auctions absorbing over Rs 5.5 lakh crore, with a 3-day auction planned to absorb Rs 7 lakh crore.
RBI Officials Meet Bank Treasury Heads Amid Surplus Concerns
Reserve Bank of India senior officials on Thursday met with treasury heads of major banks against the backdrop of banking liquidity surplus soaring to Rs 9.70 lakh crore. The meeting was called to assess market participants' views on the current and emerging liquidity situation, sources said.
The huge liquidity surplus is the result of the RBI providing a concessional swap window to banks during the June 8-August 31, 2026 period, allowing them to swap fresh dollar-denominated deposits of 3-5 years' duration mobilised by them for rupees. Extra inflows from OFCBs (Overseas Foreign Currency Borrowings) and External Commercial Borrowings (ECBs) could add even more cash to the system by year-end.
RBI Weighs Tools to Sterilise Excess Liquidity
The central bank is now weighing how best to sterilise this liquidity. Tools under consideration include a temporary cash reserve ratio (CRR) hike, open market operation sales of government securities (G-Secs), issuing bills or bonds under the Market Stabilisation Scheme (MSS), and announcing a calendar of Variable Rate Reverse Repo (VRRR) auctions.
Radhika Rao, Senior Economist and Executive Director at DBS Bank said, "Given the swap arrangement, these inflows - from FCNR(B) deposits, ECBs and OFCBs - would add to an already abundant rupee liquidity backdrop, which had touched a four-year high this month, depressing overnight rates." She added, "While organic drivers such as tax-related outflows, seasonal currency leakage, the current account deficit (1.1% of GDP), portfolio outflows and maturity of the forwards book would act as counter-balancing factors, concerted steps would still be required to drain the potential surge in liquidity."
Near-Term Options Under Consideration
According to Rao, near-term options include a temporary CRR hike, calibrated in proportion to the increase in deposits to ensure it syncs with the scale of funds raised by banks; open market operations (OMOs) or the MSS, which could mop up liquidity without distorting the FX forward curve, though potentially pushing up yields; cash management bills to bridge temporary cash flow mismatches; and a calendar of money market operations such as VRRR, but for shorter tenors.
Barclays, in a report, estimated that about Rs 7.5 lakh crore of liquidity overhang needs to be addressed. The brokerage expects a mix of continued VRRR operations and an incremental cash reserve ratio hike (ICRR) to be deployed, alongside an increase in currency in circulation during the festive period (September-November) and forex interventions, which will also help absorb liquidity.
Barclays added that it does not expect permanent liquidity absorption tools such as a CRR hike without a sunset clause, OMO sales, or MSS to be used. The report noted that retiring soon-to-mature dollar forwards could address two problems simultaneously - the large liquidity surplus and the impending large short forward book build-up - though the RBI would need to carefully weigh the costs of such a measure if it chooses to pursue it.
Also Read: RBI Special Swap Facility Mobilised $136.38 Bn, FCNR(B) Deposits Lead
RBI Conducts VRRR Auctions to Absorb Surplus Liquidity
To absorb excess liquidity from the banking system, the RBI on Thursday conducted two VRRR auctions. Under the first overnight VRRR auction, aimed at draining Rs 6 lakh crore of liquidity surplus, the central bank received and accepted offers aggregating Rs 5,18,742 crore at a weighted average rate (WAR) of 5.24%.
In the second overnight VRRR auction of Rs 1.50 lakh crore, the RBI received and accepted offers aggregating Rs 34,652 crore, also at a WAR of 5.24%. The RBI is scheduled to conduct a 3-day VRRR auction on Friday to absorb surplus liquidity amounting to Rs 7 lakh crore from the banking system.
