RBI Meets Lenders to Manage Surge in Banking Liquidity After Record Dollar Inflows
The Reserve Bank of India (RBI) met top lenders on Thursday to discuss liquidity management after measures to mobilise dollars led to larger-than-expected inflows, according to sources close to the development.
The meeting comes as surplus liquidity in the banking system has surged, pushing overnight borrowing costs significantly below the RBI’s policy rate.
At the meeting, lenders proposed using foreign exchange sell-buy swaps to gradually drain excess rupee liquidity from the banking system, Reuters reported, citing sources familiar with the discussions.
Buoyed by the RBI’s special foreign exchange swap windows that drew a much larger-than-expected $136.4 billion, the surplus in the banking system liquidity surged to a record Rs 9.70 lakh crore on Wednesday, surpassing the previous high of Rs 9.21 lakh crore recorded on September 5, 2021. Kotak Mahindra Bank expects durable liquidity to peak at around Rs 12 lakh crore in September, even after accounting for currency leakages, maturing forwards and CRR build-up.
The liquidity glut is already pulling short-term rates lower. The weighted average call rate fell six basis points to 4.96% on Thursday, slipping below 5% for the first time in five months, according to CCIL data. One-month certificate of deposit rates declined to 5.91%, their lowest in four months.
“Mopping up the surplus banking liquidity is a challenge,” Nomura said, adding that the RBI may need to use a combination of liquidity-absorption tools. These include variable rate reverse repo (VRRR) operations and cash management bills in the short term, and incremental cash reserve ratio (CRR), open market operations (OMOs), market stabilisation scheme (MSS) bonds and sell-buy swaps for more durable absorption.
Radhika Rao, senior economist and executive director at DBS Bank, said “concerted steps” would be required to drain the liquidity surge, listing a temporary CRR hike, OMOs, MSS, sell-buy swaps and shorter-tenor money-market operations among the options.
The RBI announced VRRR auctions totalling Rs 53.5 lakh crore between August 6 and September 2 to absorb excess liquidity.
A CRR hike, however, could be complicated because special FCNR(B) deposits were exempted from CRR and statutory liquidity ratio (SLR) requirements. Rao said such a move “could be viewed as effectively unwinding the RBI’s earlier decision to exclude these deposits from CRR and SLR requirements”. A uniform increase could also disadvantage smaller and mid-sized banks as FCNR-linked liquidity is unevenly distributed across lenders.
Analysts therefore expect the RBI to initially rely on shorter-term instruments. Kotak Mahindra Bank expects cash management bills, treasury bills and MSS to be used before more durable sterilisation measures are considered. Jefferies sees a lower probability of a CRR hike, saying the inflows should boost liquidity ahead of the festive season and “may help keep rates lower”.
For banks, abundant liquidity could support stronger loan growth. Motilal Oswal has raised its FY27 system credit growth estimate by around 150 basis points to 15.5-16%, saying the forex inflows should support balance-sheet expansion.
The benefit may not fully translate into margins, however. “NIMs are expected to be under pressure in the near term on account of limited spread on the overseas leveraged portion of FCNR(B) deposits,” Motilal Oswal said. Deployment of these deposits and an improving asset mix should nevertheless support faster balance-sheet growth and earnings.
Jefferies also said FCNR(B) funding carries lower net interest margins but remains “accretive to NII”, with better liquidity potentially benefiting NBFCs and smaller private banks.
The inflows are also expected to strengthen India’s external balance. Nomura estimates the surge in foreign currency mobilisation could lift the balance of payments surplus to around $66 billion in FY27, compared with a $23.6-billion deficit in FY26. Bank of Baroda expects a FY27 surplus of $65-75 billion.
However, the build-up in the RBI’s forward liabilities could constrain its ability to use the forex market to manage liquidity. Axis Bank estimates the central bank’s short forward position could rise above $220 billion from around $136 billion at end-June after accounting for the incremental inflows.
Rao also flagged the “bunched-up maturities” of the three- and five-year deposits. A portion of existing reserves could potentially be set aside against these liabilities to limit a sharp increase in dollar demand when the deposits mature.
This article was first uploaded on September three, twenty twenty-six, at fifty-five minutes past eleven in the night.
© The Indian Express (P) Ltd
aniltikotekar4sme.com 