A record cash surplus at Indian banks is fading quickly as the Reserve Bank of India keeps liquidity tight to curb bets against the rupee. Excess funds with lenders have shrunk from a high of 11 trillion rupees ($116 billion) in early September to 462 billion rupees as of Oct. 26, according to a Bloomberg Economics index. The squeeze has intensified since the Reserve Bank of India took sweeping measures to defend the rupee as it approached a record low.
Analysts at IDFC First Bank and Emkay Global Financial Services expect the crunch to persist, saying the RBI appears reluctant to fully replenish banking system liquidity. "The tightness seems intentional," said Madhavi Arora, chief economist at Emkay Global Financial Services. The RBI's actions appear designed to raise the cost of hedging against further rupee weakness. The central bank has capped liquidity support at 1.5 trillion rupees, refraining from offering more funds when demand exceeds availability.
This tightness has pushed overnight borrowing rates close to the top end of the policy range. Governor Sanjay Malhotra said monetary policy could address financial-stability risks, and the rate-setting committee "certainly deliberates" on using interest rates as a currency-defense toolkit. Rates on fresh three- and six-month certificates of deposit rose about 40-50 basis points to a seven-month high, spreading the crunch through domestic funding markets.
Higher bank funding costs may make it more expensive for non-bank lenders to raise money, with analysts noting uncertainty on future rate direction if crude oil prices rise.
Source: Bloomberg Markets · Summarized by HeadlinesBriefing