India’s record bank cash surplus fades as RBI curbs rupee bets

India's record bank cash surplus is rapidly diminishing as the Reserve Bank of India (RBI) continues to restrict liquidity in an effort to limit bets against the domestic currency. Bank excess funds have plummeted from a peak of 11 trillion rupees ($116 billion) in early September to 462 billion rupees as of October 26, according to a Bloomberg Economics index.

The RBI's actions intensified following recent measures to shore up the weakened rupee, which approached a record low. Analysts predict the liquidity crunch will persist, as the central bank appears hesitant to fully replenish liquidity in the banking system. The RBI has only provided limited relief, capping liquidity support at 1.5 trillion rupees and refraining from offering additional funds when demand exceeds the available amount.

This tightness has driven overnight borrowing rates near the upper limit of the central bank's policy range. RBI Governor Sanjay Malhotra hinted that monetary policy could be used to address financial-stability risks, including currency defense, though he noted the rate-setting committee debates this approach. As the cash crunch spreads through domestic funding markets, borrowing costs for fresh three- and six-month certificates of deposit have risen by about 40-50 basis points last week to a seven-month high.

This increase could make it more expensive for non-bank lenders to raise capital, potentially imposing higher borrowing costs on the broader financial sector.