India’s Liquidity Surplus at 46,200 Crore Rupees as Central Bank Tightens Defenses for Rupee
Key Facts
Funds surplus among Indian lenders fell to 46,200 crore rupees on October 26, from a peak of 11 trillion rupees in early September, according to the Bloomberg Economics indicator cited in a Business Standard report. The contraction came after the Reserve Bank of India took broad measures earlier in the month to defend the rupee as it approached a record low, the report said. The report attributed the surplus level to the economic indicator, not to a direct statement from the central bank. The bank capped liquidity support at 1.5 trillion rupees up to that point. It refrained from providing additional funds on days when demand exceeded the amount on offer, further tightening funding in the banking system.
“Liquidity tightness seems deliberate,” said Madhavi Arora, chief economist at Emkay. The Business Standard report linked higher borrowing costs to an effort to make rupee borrowing and dollar purchases more expensive for traders. Overnight borrowing rates neared the upper end of the central bank’s monetary policy corridor. Rates on new three- and six-month certificates of deposit rose about 40 to 50 basis points in the week before the report, reaching a seven-month high. The moves show liquidity tightness feeding through to the short-term funding costs faced by banks and borrowers.
The average liquidity surplus in the banking system stood at 7.3 trillion rupees, or about 2.7% of deposits, from the start of September through October 7, according to a Reuters report. On October 9, the Reserve Bank of India announced a sale of bonds worth 250 billion rupees through open-market operations as part of efforts to drain liquidity. It also raised the daily cash reserve requirement to 99% effective October 16, from 90% previously. Governor Sanjay Malhotra said the liquidity surplus would not last long and that a large part of it could be absorbed before the end of the fiscal year. He attributed this to currency leakage, banks’ reserve requirements and central bank operations.
The surplus-absorption tools cited by the governor include bond sales, foreign-exchange swaps, variable-rate reverse repo operations and spot intervention in the currency market. Malhotra said on Friday that monetary policy may sometimes be used to address financial stability risks. He added that the rate-setting committee “is certainly discussing” the possibility of including interest rates among the tools for defending the currency. On October 12, the rupee rose about 1% to 95.77 per dollar, its best daily gain since April, after the bank’s measures to curb dollar demand. The dollar closed at 95.175 rupees on October 26, 95.105 on October 27 and 95.21 on October 28, according to EL7 data.
On industrial activity, statistics ministry data showed that the manufacture of motor vehicles, trailers and semi-trailers rose 25.2% in August, while electrical equipment manufacturing increased 30.9% and other transport equipment rose 25.3%. By use-based classification that month, production of capital goods grew 16.9%, intermediate goods 13.7% and consumer durables 11.1%, compared with 2.1% for non-durables. In September, electrical equipment, rubber and plastic products, and motor vehicles were the largest positive contributors to manufacturing growth, at 33.9%, 19.9% and 19.0%, respectively. The ministry said August figures had undergone a final revision based on updated data from source agencies. The industrial production index reading for October is due to be released on November 30, 2026.