RBI bond sales, FX intervention help halve India's cash overhang

Sustained Reserve Bank of India action through bond sales, foreign exchange swaps, and rupee defence has helped more than halve the banking system's liquidity surplus, bankers said.

Surplus banking system liquidity fell to 4.92 trillion rupees ($51.36 billion) on Monday, down 55% from a record 11.16 trillion rupees about two weeks ago. India's banking system was flush with cash after lenders raised a much larger-than-expected $133 billion through the RBI's diaspora deposit scheme.

Excess cash threatens to fan inflationary pressures, potentially adding to the impact of elevated oil prices and a weaker rupee.


Earlier in the month, RBI Governor Sanjay Malhotra had pointed to bond sales and FX swaps as options to drain the excess in a media interview.

Many bankers said the drain in liquidity was driven by the RBI's open-market bond sales and foreign exchange swaps. Advance tax and goods and services tax payments also shaved liquidity.

The RBI sold 750 billion rupees of bonds over the past week and plans another 250 billion rupees on Monday. Banks have also parked 3.4 trillion rupees with the RBI through reverse repos.

Three traders estimated the RBI conducted FX swaps of about $1 billion a day over the past 10 sessions, with Tuesday's swaps concentrated in the January 2027 maturity.

None of the sources could be named because they are not authorised to speak to media.

The central bank's move also comes amid rising market wagers on rate hikes by the central bank which have reflected in size of such tightening priced by swap markets over the next one to 12 months.

"We now expect three consecutive 25bp hikes starting from October 2026, taking the policy repo rate to 6.00% by the end of fiscal 2027," said Dhiraj Nim, economist and FX strategist at ANZ.

The RBI would also need to continue withdrawing excess liquidity and bring it to below 3 trillion rupees for an October hike to be effective, Nim added.

Other foreign lenders including Citi, HSBC and Deutsche Bank have also called for a rate hike in October.