RBI Rate Hike Chances Rise As Banking System Liquidity Surplus Hits Record ₹10.3 Trillion
· Free Press Journal
The possibility of the Reserve Bank of India (RBI) raising interest rates at its October monetary policy meeting has increased after the central bank announced a ₹7 trillion variable rate reverse repo (VRRR) auction to absorb excess liquidity from the banking system.
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According to a report by Business Standard, the 30-day VRRR auction, scheduled with a reversal date close to the October 5-7 policy review, comes as banking system liquidity surplus touched a record ₹10.3 trillion. The surplus exceeded the previous high of ₹9.7 trillion recorded a day earlier.
Liquidity surge creates policy challenge for RBI
The rise in liquidity has been driven by significant foreign currency inflows through the RBI’s concessional swap facility. India’s foreign exchange reserves climbed to a record $740.8 billion for the week ended August 28, supported mainly by an increase in foreign currency assets.
Indian Markets Rally As Fed Rate Hike Fears Ease, Smallcaps Steal The Show With A Fresh Lifetime HighForeign currency assets, the largest component of reserves, have increased by nearly $60 billion over nine weeks, while total reserves have risen by $73.9 billion during the period.
Market participants believe the RBI now faces a difficult choice between managing excess liquidity and addressing concerns around the rupee and bond markets.
The VRRR auction has provided some relief to investors as the central bank allowed banks to seek premature reversal of funds parked under the facility.
Dealers said the move indicates that the RBI may avoid additional liquidity-tightening measures before the October policy meeting.
Some market participants expect the possibility of a rate hike to gain importance as liquidity management becomes more challenging.
FCNR(B) inflows boost forex reserves
The sharp rise in reserves has largely been supported by Foreign Currency Non-Resident (Bank), or FCNR(B), deposits raised through the RBI’s swap facility. Banks mobilised around $127.2 billion through the scheme, while the overall inflows through related channels crossed expectations.
Although the FCNR(B) deposit window closed on August 31, banks can continue accessing the swap facility for deposits already contracted until September 11.
Economists expect foreign currency assets to rise further as additional inflows enter the system. Analysts estimate FCAs could increase to around $640-650 billion in the coming weeks.
While stronger reserves have improved India’s external position and supported the rupee, the resulting liquidity surplus has complicated the RBI’s monetary policy decisions. The central bank will now have to balance growth support, inflation risks and market stability ahead of the October review.