RBI Struggles to Drain Surging Liquidity From Banks

Banks in India currently have much more money than they can easily lend or invest.

This happened partly because foreign dollars entering through an RBI swap program were converted into rupees.

The extra rupees increased the amount of money available in the banking system.

When there is too much money, short-term interest rates can fall below the RBI’s target rate.

Very easy money can also add to inflation.

The RBI wants to remove some of the excess money, but it must avoid suddenly raising interest rates or disturbing the bond market.

It is already using auctions to temporarily absorb money from banks.

It may also use tools such as higher reserve requirements or bond sales if the surplus continues.