RBI Absorbs Over ₹6 Lakh Crore As Banking System Liquidity Surges To Record High
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Summarized by AI; it may make mistakes. Check important info
The Reserve Bank of India (RBI) absorbed more than ₹6 lakh crore from the banking system through liquidity-absorption operations on Monday, a day after surplus liquidity surged to a record ₹11.6 lakh crore, raising concerns over excess funds fuelling inflation and financial asset prices.
The central bank received bids worth ₹3.53 lakh crore in an overnight reverse repo auction after banks had parked ₹2.59 lakh crore through a 30-day operation.
RBI Gets ₹3.53 Lakh Crore In Overnight Bids
The RBI had notified an overnight reverse repo operation for ₹5 lakh crore, but received bids worth ₹3,53,390 crore.
The central bank accepted the entire amount at a cut-off and weighted average rate of 5.24 per cent, according to the auction statement.
The RBI had also sought to absorb ₹7 lakh crore through a 30-day operation. However, participation was weaker than expected.
Five traders attributed the muted response to technical glitches, while a person familiar with the matter said there were no glitches and that all bids were processed through the RBI's e-Kuber system. The person spoke on condition of anonymity as they were not authorised to speak to the media.
Banking System Liquidity Hits ₹11.6 Lakh Crore
India's banking system liquidity surplus stood at ₹11.6 lakh crore on September 6, equivalent to nearly 4 per cent of total banking system deposits.
The surge followed large foreign-currency inflows under special schemes aimed at strengthening India's external balances.
The RBI's cumulative liquidity withdrawals have crossed ₹8.5 lakh crore, although the funds will return to the banking system as the various operations mature.
A treasury official said the central bank could consider another longer-duration reverse repo operation later in the week despite the weaker-than-expected response to the 30-day auction.
Large Foreign Inflows Flood Banking System
The liquidity surge has been linked to the strong response to the RBI's special dollar-rupee forex swap facility covering FCNR(B) deposits, Overseas Foreign Currency Borrowings and External Commercial Borrowings.
Launched on June 8, the facility has resulted in foreign exchange inflows of around $73 billion in less than 11 weeks, according to the information provided.
FCNR(B) deposits accounted for $65.40 billion, reflecting a strong response from non-resident Indians.
The RBI subsequently advanced the closure of the FCNR(B) window from September 30 to August 31, after the scheme met its objective ahead of schedule.
RBI May Use Multiple Tools To Drain Excess Cash
Banks have shown stronger interest in shorter-duration reverse repo operations, while longer-tenor auctions tend to attract weaker participation as lenders are reluctant to lock away funds for extended periods.
IDFC First Bank expects the RBI to use a combination of instruments to manage the surplus liquidity.
Gaura Sen Gupta, chief economist at IDFC First Bank, said market stabilisation scheme bonds and sell-buy swaps could be among the preferred options, although both come with their own challenges.
The RBI has stepped up liquidity absorption as the banking system continues to receive substantial funds from the special FCNR(B) inflows. Sustained excess liquidity could add to inflationary pressures and boost financial asset prices, while stronger inflation and growth could also influence the central bank's future interest-rate decisions.
