RBI Plans Rs 7 Lakh Crore Move to Reduce Excess Cash in Banks
Mumbai, Sep 5: The Reserve Bank of India (RBI) is taking steps to reduce the large amount of surplus cash in the banking system after strong foreign-currency inflows increased liquidity in the financial market.
The RBI will conduct a 30-day variable-rate reverse repo auction for Rs 7 lakh crore on Monday. The longer-duration operation is aimed at temporarily taking excess funds out of the banking system and keeping short-term money-market conditions stable.
Banks currently have an unusually large amount of surplus liquidity, estimated at around Rs 10.5 lakh crore. The excess cash has built up partly because banks received substantial foreign-currency deposits from overseas Indians and later converted the funds into rupees.
The RBI’s deposit scheme attracted a record $127 billion before it was closed in August. Additional overseas borrowing by banks and state-owned companies brought total inflows linked to these measures to around $136.4 billion.
The strong inflows have helped improve India’s external financial position, but they have also increased the amount of rupee liquidity available to banks. The RBI is now working to absorb this excess cash without disturbing financial markets.
The impact of the surplus liquidity can already be seen in overnight borrowing rates. The weighted average call rate, which reflects the rate at which banks lend to each other for short periods, has fallen below the RBI’s policy rate because banks have plenty of funds available.
By conducting the 30-day reverse repo auction, the RBI aims to keep some of this excess money parked with the central bank for a longer period. This can help bring short-term interest rates closer to the central bank’s desired level.
The move is important for both banks and the wider economy. Too much liquidity can push short-term borrowing costs lower, while carefully managing excess cash helps the RBI maintain better control over monetary conditions.
The latest action shows that the RBI is trying to strike a balance between the benefits of strong foreign inflows and the need to prevent excess liquidity from affecting the smooth functioning of the money market.