Dollar Selling by RBI Is Starving Indian Banks of Liquidity

(Bloomberg) -- Indian banks suffered a deficit of liquidity this week for the first time in two months as dollar sales by the authorities to support the rupee drained cash from the financial system.

Banks borrowed a net 141.98 billion rupees ($1.68 billion) of funds from the Reserve Bank of India on Monday, the first time they have needed a fund injection since Sept. 25, according to a Bloomberg index. Liquidity conditions have deteriorated significantly from the beginning of this month, when banks were parking around 2 trillion rupees of surplus cash with the RBI every day.

The cash shortfall has pushed up the interbank weighted average call rate — a benchmark for overnight borrowing costs — to near the highest levels since June. The rate climbed to 6.73% last week, more than 20 basis points above the RBI’s current repurchase rate of 6.50%.

“The main worry is that the core liquidity, the underlying liquidity situation, has worsened because of FX outflows,” said Abhishek Upadhyay, a senior economist at ICICI Securities Primary Dealership in Mumbai. “It’s quite likely that from mid-December onwards, when we get the quarterly advance tax outflows, overall system liquidity could be in persistent deficit mode.”

The RBI has likely stepped up its dollar sales since Donald Trump’s US election victory in early November triggered a rally in the greenback. While the rupee did slide to a record low of 84.5025 per dollar in intraday trading last week, it has weakened less than most of its Asian peers this month.

India’s core liquidity surplus, which includes banking system liquidity and the government’s cash balances, fell to 1.6 trillion rupees as of Nov. 15 from 4.6 trillion rupees as of Sept. 27, according to Gaura Sengupta, chief economist at IDFC First Bank Ltd. in Mumbai.

“The reduction in core liquidity indicates that system liquidity tightness could persist if balance-of-payments outflows persist,” Sengupta said. The RBI probably sold about $22.7 billion of dollars from the end of October 2024 through until Nov. 15, he said.