RBI sees liquidity surplus peaking in September before normal absorption

Governor Sanjay Malhotra says surplus liquidity is likely to peak around September before being absorbed through higher currency circulation, reserve requirements and maturing forex forwards

Surplus liquidity in the banking system is expected to peak around September before being absorbed by the economy's normal liquidity requirements, Reserve Bank of India (RBI) Governor Sanjay Malhotra said on Wednesday at the post-monetary policy press conference, indicating that the liquidity impact of the FCNR(B) mobilisation scheme will be temporary.

 

The Governor said the surplus would be absorbed through an increase in currency in circulation, higher reserve requirements as deposits grow and the maturity of foreign exchange forward contracts.

 

"Liquidity may be in surplus only for the very short term. It may peak in Q2 (FY27), around September or so, and going forward it should get absorbed because of our normal needs of the economy through increase in currency in circulation, higher requirement for reserves because of deposit growth. We also have some forwards which are getting matured," Malhotra said.

 

He said the liquidity created would not be "extraordinary" or "substantial". The RBI provides similar levels of liquidity every year through open market operations and foreign exchange swaps, he said, adding that the eventual liquidity impact would depend on the amount of FCNR(B) deposits mobilised under the scheme.

 

The RBI last month announced a concessional swap window for banks to mobilise FCNR(B) deposits as part of a package of measures to attract foreign capital.

 

Asked whether the liquidity arising from the scheme was intended to support credit growth and demand, Malhotra said the RBI's liquidity operations are aimed at aligning the weighted average call rate (WACR) with the policy repo rate.

 

"The kind of liquidity that we will give out will depend on what is the policy repo rate. And what the policy repo rate will be determined by the growth and the inflation dynamics where your demand also comes in," he said.

 

The banking system liquidity surplus, measured by the average daily net position under the liquidity adjustment facility (LAF), averaged Rs 1 trillion since the June policy meeting.

 

Malhotra said the RBI would proactively conduct two-way liquidity operations to ensure sufficient liquidity in the banking system, guided by the objective of aligning the WACR with the policy repo rate.

 

The weighted average call rate averaged 5.31 per cent since the June policy meeting, remaining within the policy corridor. Short-term money market rates, including commercial paper and certificate of deposit rates, moderated in July, while government security yields eased across maturities following measures announced by the government and the RBI to attract foreign capital into the debt market.