Cash runs dry as RBI steps up fight to save rupee

Indian banks' record cash surplus is rapidly disappearing as the central bank tightens liquidity to combat bets against the currency, according to Bloomberg Economics data. The excess funds held by lenders have plummeted from 11 trillion rupees ($116 billion) in early September to 462 billion rupees as of October 26. The RBI's efforts to defend the rupee as it neared a record low have only intensified the squeeze since the central bank implemented sweeping measures earlier this month.

Analysts from IDFC First Bank and Emkay Global Financial Services predict the crunch will continue, citing the Reserve Bank of India's apparent reluctance to fully replenish liquidity in the banking system. Madhavi Arora, chief economist at Emkay, asserts that the tightness is intentional, as higher borrowing costs make it costlier for traders to hedge against further rupee weakness and bet against the currency.

While the central bank has provided limited relief, capping liquidity support at 1.5 trillion rupees, the resulting tightness has pushed overnight borrowing rates close to the upper limit of the central bank's policy range. Reserve Bank Governor Sanjay Malhotra hinted that monetary policy could be used to address financial stability risks, suggesting that interest rates could be part of the currency-defense toolkit.