India’s central bank will lock up excess banking cash for longer, stepping up efforts to manage a record liquidity glut fueled by its drive to attract dollars from overseas Indians.
The Reserve Bank of India will hold a 7 trillion rupee ($74.1 billion), 30-day variable-rate reverse repo auction on Monday, it said in a statement.
The longer tenor marks a shift from recent operations of up to 15 days and will allow the RBI to keep excess cash out of the banking system for an extended period. The tool is less forceful than some alternatives because banks choose how much money they want to park with the central bank.
India’s banking system is awash with a record 10.5 trillion rupees of excess cash, according to a Bloomberg Economics index, after the central bank exchanged dollars raised by banks from overseas Indians for rupees.
“Participants will have an option for premature reversal of the amount lent in the above auction,” the release added.
The RBI’s program to attract foreign-currency deposits from the diaspora garnered a record-breaking $127 billion, prompting it to close the window a month ahead of schedule in August. Including subsidized overseas borrowing by banks and state-run companies, the measures brought in $136.4 billion.
The success has created a new challenge for the RBI: How to remove all that extra cash at a time when it is increasingly focused on inflation. The weighted average call rate — the overnight rate at which banks lend to each other and a key gauge for the RBI — has slipped below the central bank’s policy rate as surplus cash drives down borrowing costs.
That leaves financial conditions looser than the RBI may want as higher global crude prices threaten to add to inflation. Minutes of its August meeting showed policymakers were already leaning toward tighter policy.
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