Surplus liquidity crosses 11 lakh crore in money market

MUMBAI: Surplus liquidity in India's money market has crossed Rs 11 lakh crore, leaving Reserve Bank of India to mop up an unusually large pool of cash unleashed by banks' $136 billion mobilisation of foreign-currency deposits. The central bank has responded with a battery of operations, seeking to prevent an excess of rupees from pushing short-term rates too far below its policy rate.RBI has absorbed more than Rs 4.6 lakh crore through 30-day variable-rate reverse repos (VRRR), and another Rs 6.6 lakh crore through overnight repos and standing deposit facility (SDF) operations. It has also used dollar-rupee buy-sell swaps with banks to drain liquidity. By taking dollars out of the market and supplying them forward, these swaps raise the dollar's forward premium while easing immediate demand for dollars in the spot market, reducing pressure on the rupee.The liquidity deluge is an unintended consequence of a special concessional swap window designed to strengthen India's external balances. Data through Aug 31 showed that the facility attracted $136.4 billion of foreign-currency inflows, including $127.2 billion through FCNR(B) deposits. Banks swapped the dollars with RBI for rupees, releasing a large quantity of domestic liquidity into the banking system.The question is what banks will do with the cash. Axis Bank MD & CEO Amitabh Chaudhry warned that the inflows could result in "abnormal lending", reminding markets of past excesses of banks.SBI chairman CS Setty is less worried as he does not expect the liquidity surplus to distort credit growth, which has been expanding at 18.3% year-on-year, and expects the excess liquidity to be absorbed within a quarter.The inflows accelerated in Aug as banks offered higher rates to non-resident depositors, while RBI absorbed the associated hedging costs. Sneha Pandey, fund manager at Quantum AMC, said the monthly increase was particularly sharp. "While core liquidity crossed Rs 10 lakh crore, the daily average surplus stood at Rs 3.67 lakh crore in Aug, more than three times July's Rs 1.07 lakh crore."Banks initially preferred to keep the money close at hand rather than commit it to longer-term assets. "RBI has been running back-to-back Variable Rate Reverse Repo (VRRR) auctions on successive days... banks prefer to park at 1 to 3 days and keep their powder dry for credit demand," Pandey said.The effect is showing up in money-market rates. As system liquidity crossed Rs 10 lakh crore, the weighted average call rate fell below 5% to 4.96%, slipping below RBI's policy repo rate. On the other hand, yields in the longer-duration papers have hardened.The surge in FCNR(B) inflows has strengthened India's external position, but it has also created a significant liquidity overhang that RBI will need to manage carefully, said Ram Kamal Samanta, CIO, Star Union Dai-ichi Life Insurance.On the rupee front, according to Radhika Rao, senior economist and ED, DBS Bank, the foreign-currency inflows had compounded an already substantial rupee surplus. "Given the swap arrangement, these inflows will add to an already abundant rupee liquidity backdrop, which was at a four-year high this month, depressing overnight rates."Get the latest Business News and Live updates. Download the TOI app.