India: Managing Liquidity and FX — Buying Time and Flexibility

Key Takeaways

• 1.Record FCNR(B) deposit inflows of $127bn pushed banking system liquidity surplus to around INR 10tn (3.6% of NDTL), driving overnight call rates below the policy repo rate.
• 2.The RBI requires an estimated INR 4.0–6.5tn (1.5–2.5% of NDTL) of liquidity absorption during September–December, with roughly half requiring permanent tools like OMO sales while seasonal currency in circulation normalizes surplus by March 2027.
• 3.Liquidity sterilization involves trade-offs: VRRRs impose interest costs on the RBI, MSS on the fiscal account, CRR increases non-remunerated bank reserves, and OMO sales risk hardening G-Sec bond yields.

Table of Contents

• Managing Liquidity and FX
• Outlook for banking system liquidity going forward
• Buying time and optionality
• Cost implications of liquidity absorption
• Balance of Payments Outlook

Report data

Exhibit 6: Implications of using various liquidity absorption tools

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