Source Reuters
MUMBAI — India’s banking sector is experiencing an unprecedented surge in liquidity, driven by a massive influx of foreign funds. Following the Reserve Bank of India’s (RBI) special foreign-currency deposit scheme, the system’s liquidity surplus has skyrocketed to a record 9.70 trillion rupees (approximately $102.70 billion).
The staggering surplus surpasses the previous peak recorded in September 2021 in the aftermath of the Covid-19 pandemic. The sharp increase is primarily attributed to Indian banks mobilizing a larger-than-expected $127.23 billion through the non-resident foreign-currency deposit scheme, known as FCNR(B). As lenders swapped these dollar deposits with the central bank for local currency, a massive deluge of rupee liquidity was injected into the financial system.
While the influx bolsters foreign exchange reserves, it has left the RBI facing a “problem of plenty”. To manage the excess cash and keep short-term interest rates aligned with its policy target, the central bank has multiple tools at its disposal. Experts suggest the RBI may employ instruments such as variable rate reverse repo (VRRR) auctions, shorter tenor dollar-rupee sell-buy swaps, or adjustments to the cash reserve ratio (CRR). Additionally, the central bank could look at open market bond sales or revive previously used market stabilization schemes to effectively absorb the excess liquidity.
As the RBI navigates this record-breaking liquidity wave, market participants are closely watching the central bank’s next moves to ensure stability in the domestic banking system.
