Indian Economy / RBI to Lock Rs7 Lakh Crore Liquidity for 30 Days Amid Record Cash Glut

Mumbai, Sep 5: Confronted with an unprecedented cash surplus in the banking system, the Reserve Bank of India (RBI) has moved to tighten liquidity conditions by announcing a 30-day variable-rate reverse repo auction worth Rs7 lakh crore ($74.1 billion). The step comes as foreign-currency inflows from overseas Indians swell rupee liquidity to record highs, posing fresh challenges for monetary management.

The longer-tenor auction marks a departure from recent short-duration operations of up to 15 days, signaling the central bank’s intent to keep excess funds locked away for an extended period. By absorbing surplus liquidity, the RBI aims to exert firmer control over short-term money-market rates, though the reverse repo mechanism remains voluntary for banks.

India’s banking system is currently awash with excess cash estimated at around Rs10.5 lakh crore, according to Bloomberg Economics. The glut stems largely from the RBI’s conversion of foreign-currency deposits mobilised by banks into rupee liquidity.
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The central bank’s special drive to attract deposits from the Indian diaspora proved highly successful, raising a record $127 billion before the scheme closed ahead of schedule in August. Alongside subsidised overseas borrowings by banks and state-owned firms, total inflows reached $136.4 billion, strengthening India’s external financing position but complicating domestic liquidity management.

While the inflows bolstered reserves, policymakers now face the delicate task of withdrawing surplus rupee liquidity without unsettling financial markets. The RBI’s focus remains on containing inflationary pressures even as money-market rates reflect the impact of abundant cash. The weighted average call rate has already slipped below the policy rate, underscoring the urgency of corrective measures.
(With inputs from IANS)