India’s central bank has enough tools to absorb a record surge in banking-system liquidity following its massive foreign-currency deposit drive, Governor Sanjay Malhotra said Friday, as policymakers seek to prevent the cash glut from pushing borrowing costs lower and fueling inflation. The RBI will use all available measures to withdraw surplus funds, Malhotra said, citing open-market operations and swaps. "Nothing is off the table." He ruled out raising the cash reserve ratio to absorb liquidity.

The urgency to absorb excess liquidity has grown as abundant cash risks keeping financial conditions looser than the RBI may be comfortable with. Minutes of the August meeting showed policymakers were already turning more hawkish. Later on Friday, the RBI said it will conduct open market operations to sell up to 1 trillion rupees ($10.5 billion) of bonds in the secondary market. India’s foreign exchange reserves rose to an all time high of $785.71 billion in the week of Sept. 4. India’s excess banking liquidity recently hit 11 trillion rupees ($115 billion), a peak. The deluge followed a $127 billion inflow from the country’s vast diaspora.

Malhotra pushed back against estimates that the deposit drive will prove costly, saying the inflows will instead generate additional income. He said the RBI’s monetary policy stance is "appropriate," with no signs of "overheating even in the consumption loans." The central bank was also "not entirely surprised" by stronger-than-expected growth in the April-June quarter. "The Indian economy has weathered this shock really well," he said. India’s economy grew 7.8% in the April-June quarter, exceeding analysts’ expectations. Higher energy prices add another risk, with crude oil above $100 a barrel. Retail inflation is expected to edge higher, with data due Monday forecast to show consumer prices rising to 4.86% in August from 4.45% in July.