FCNR rush leaves banks swimming in ₹6.65 lakh crore liquidity
Banking system liquidity has reached a four-year high of ₹6.65 lakh crore, primarily driven by substantial FCNR(B) inflows. This surge has pushed the weighted average call rate significantly below the repo rate, indicating abundant funds in the interbank market. To manage this surplus, the RBI has been actively conducting variable rate reverse repo operations, absorbing a significant portion of this liquidity. Treasury heads are showing a preference for shorter tenures in these operations, anticipating a normalization of liquidity conditions.
What this means
The influx of FCNR(B) deposits, likely spurred by attractive temporary rates, has created an unusually high liquidity surplus in the banking system. This situation typically leads to lower short-term lending rates among banks and reduces their reliance on RBI's repo window. Banks will need to manage this excess liquidity efficiently, potentially leading to increased investments in government securities or reduced marginal cost of funds.
Most affected: Bank treasuries, liquidity management, short-term money markets
Key takeaway: Monitor the weighted average call rate and RBI's VRRR operations for sustained liquidity absorption and its implications for short-term rate trends.
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