1 hr ago
India's Banking Liquidity Surges, Prompting RBI Absorption Measures
Banks in India suddenly have much more money available than usual.
The extra money mainly came from foreign-currency deposits made through FCNR(B) accounts.
This pushed total banking-system liquidity to Rs 7.7 lakh crore, the highest level in four years.
The Reserve Bank of India is taking some of this extra money back temporarily through auctions.
More available money has helped lower the overnight interest rate between banks.
Banks can use the funds to replace expensive deposits and certificates of deposit.
This may reduce their funding costs and support their profit margins.
Banks may also lend more aggressively, which could create competition and lower some lending rates.
Analysts expect liquidity to remain abundant for the next three to four months.
Banking system liquidity reached a four-year high of Rs 7.7 lakh crore on Tuesday, driven largely by FCNR(B) deposit inflows.
Average system liquidity rose to Rs 3.67 lakh crore in August from Rs 1.07 lakh crore in July, according to RBI data.
The RBI conducted VRRR auctions totaling Rs 15 lakh crore over two days and received bids worth Rs 8.34 lakh crore.
The weighted average call rate fell to 5.02% on Wednesday from 5.16% on Tuesday, below the 5.25% repo rate.
Banks are using the surplus to reduce reliance on costly bulk deposits and certificates of deposit, potentially lowering funding costs and intensifying lending competition.
- Who
- The Reserve Bank of India, commercial banks, and banking analysts and officials quoted in the report.
- What
- Banking-system liquidity surged to Rs 7.7 lakh crore, prompting the RBI to increase liquidity-absorption operations.
- Where
- India's banking system.
- When
- Liquidity reached the reported high on Tuesday; the RBI conducted further operations on Wednesday. Abundant liquidity is expected to continue for three to four months.
- Why
- Large FCNR(B) deposit inflows increased available funds, while the RBI is absorbing excess liquidity to keep overnight rates close to the policy repo rate.
Arguments for letting liquidity flow
Arguments for absorbing excess liquidity
Effect on banks and borrowers
Arguments for letting liquidity flow
Bank officials and analysts said surplus funds could replace expensive bulk deposits and certificates of deposit, reduce funding costs, support margins, and encourage more aggressive lending.
Arguments for absorbing excess liquidity
Market participants expect the RBI to absorb additional funds because excess liquidity has pushed overnight rates below the policy repo rate and could intensify a lending-rate price war.
Possible RBI policy response
Arguments for letting liquidity flow
Some surplus liquidity may naturally move into bank credit or government securities, with an estimated Rs 2-3 lakh crore potentially absorbed over one to two months.
Arguments for absorbing excess liquidity
Gaura Sengupta said the RBI could use short-term Treasury bills under the Market Stabilisation Scheme or sell-buy swaps; she considered an incremental CRR less likely because it could hurt market sentiment.
Key facts
- System liquidity
- Rs 7.7 lakh crore on Tuesday, a four-year high
- August average liquidity
- Rs 3.67 lakh crore, compared with Rs 1.07 lakh crore in July
- Primary liquidity source
- Foreign-currency inflows through FCNR(B) deposits
- Repo rate
- 5.25%
- Weighted average call rate
- 5.02% on Wednesday, down from 5.16% on Tuesday
- Certificates of deposit issued
- Rs 68,130 crore in August, the lowest in four months
- Three-month CD rate
- 6.05%, down 127 basis points over three months
Quotes
Senior official at a private sector bank
Unnamed senior official at a private sector bank
“After accounting for tax-related outflows, system liquidity could reach around Rs 5 lakh crore by September. However, liquidity is likely to remain abundant over the next three-four months.”
financialexpress.com
“System liquidity is above Rs 7 lakh crore, pushing core liquidity close to Rs 9 lakh crore. Core liquidity will exceed Rs 10 lakh crore in September, primarily due to FCNR(B) inflows.”
financialexpress.com
Sources
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