India's key overnight money market saw no borrowing orders in the first 90 minutes of trading for two consecutive days through Friday, an unusually quiet start. Banks are flush with liquidity following a record $127 billion inflow under a central bank capital-raising program. Typically, transactions surge in the first hour as lenders meet regulatory requirements and cover cash shortages.

Volumes have plummeted to a one-year low of 59 billion rupees ($624 million) on Thursday. "The delayed action in the market is simply because there are no takers for funds," said Naveen Ramnani, chief dealer of treasury and investment at UCO Bank. Surplus banking cash hit an all-time high of 10.5 trillion rupees as of Thursday. The freeze has implications for monetary policy, with the overnight funding rate plunging 30 basis points below the central bank's policy rate.

This divergence means actual borrowing costs are far lower than the Reserve Bank of India intends. Ramnani expects the RBI to continue short-tenure cash withdrawal operations this month before potentially selling bonds to reduce the surplus in October. The slowdown resembles the 2020 coronavirus pandemic period when trading activity halted during lockdowns.