Reserve Bank of India to absorb Rs 7 lakh crore in excess liquidity

The Reserve Bank of India (RBI) is moving to absorb record levels of excess liquidity from the banking system. To manage a massive cash glut, the central bank will conduct a 30-day variable-rate reverse repo auction for Rs 7 lakh crore ($74.1 billion) on Monday. This longer-duration operation marks a shift from previous 15-day auctions, aimed at exerting greater control over short-term money-market conditions.

The liquidity surge follows a highly successful initiative to attract foreign-currency deposits from the Indian diaspora. Through special swap windows, including Foreign Currency Non-Resident (FCNR-B) deposits, the RBI and banks mobilized approximately $136.4 billion. This influx has pushed India’s foreign exchange reserves to a new record high of $740.80 billion for the week ended August 28.

Major banking beneficiaries of the FCNR(B) inflows include ICICI Bank, which mobilized roughly $17.9 billion, and RBL Bank, which secured $3.4 billion. Foreign banks also saw significant gains, with their share of incremental flows rising sharply. While the inflows have strengthened India’s external financial position and provided a buffer against rupee volatility, they have also created a significant liquidity-management challenge for the RBI as it seeks to contain inflation without disrupting financial markets.