Flood of dollar deposits drives India bank liquidity surplus to all-time peak

India's banking system has reached an all-time high in liquidity surplus, with rupee liquidity surpassing levels seen during the Covid-19 pandemic. As of September 3, the surplus stood at 9.7 trillion rupees ($102.67 billion), surpassing the previous record of 9.2 trillion rupees recorded in September 2021. The surplus was driven by a flood of dollar deposits, with Indian banks raising $127.23 billion through non-resident foreign-currency deposits announced by the Reserve Bank of India (RBI).

The majority of the funds have already been swapped with the central bank, resulting in a sharp increase in rupee liquidity. While the surplus presents challenges for the RBI in managing liquidity and overnight rates, it may also improve lending conditions and support credit growth for commercial banks. The central bank is expected to closely monitor and calibrate its liquidity operations to maintain orderly conditions in financial markets.

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