The Reserve Bank of India reduced the banking system’s liquidity surplus by 55% from its early-September peak, bringing the overhang down to ₹4.92 trillion. Reuters calculations showed the decline from a record ₹11.16 trillion as the central bank combined bond sales, foreign-exchange operations and short-term cash absorption. The pullback followed exceptional foreign-currency inflows that had injected rupees into the banking system. The latest figure indicates that the RBI has removed more than half of the peak surplus.
The surplus expanded after banks mobilised large foreign-currency deposits under a concessional swap facility introduced by the RBI. Official data released on 21 September showed total inflows of $143.6 billion, including about $133 billion from Foreign Currency Non-Resident deposits. The RBI had accepted dollars from banks and supplied rupees, strengthening foreign-exchange buffers while creating excess domestic liquidity.
MULTIPLE TOOLS DRAINED EXCESS CASH
The central bank sold ₹750 billion of government bonds over the preceding week and planned a further ₹250 billion sale, according to Reuters. Banks also placed about ₹3.4 trillion with the RBI through reverse-repurchase operations. In parallel, foreign-exchange sell-buy swaps removed rupees from the market while shifting the central bank’s forward-dollar position.
The measures were designed to bring overnight money-market conditions closer to the policy stance after the liquidity surge pushed cash far above normal levels. Excess liquidity can weaken the transmission of tighter interest rates by depressing short-term funding costs. A weaker rupee and elevated oil prices have increased the importance of preventing abundant cash from adding to inflation pressure.
POLICY TRANSMISSION REMAINS IN FOCUS
Further drainage would reduce the gap between system liquidity and the level needed for routine banking operations. Reuters cited economists who expect the RBI to continue tightening financial conditions, while market participants are watching for additional bond sales and swap operations. The composition of the response matters because each tool affects bank funding, government-bond yields and forward currency markets differently.
The next milestone is whether the RBI can bring the surplus below ₹3 trillion without causing abrupt funding stress or disorderly market moves. Scheduled bond sales, daily liquidity operations and the maturity profile of foreign-exchange swaps will provide the clearest evidence. The central bank’s October policy decision will then show how liquidity management is being integrated with its interest-rate stance.