RBI Faces Up To $11 Bn Bill As Record Dollar Deposits Trigger Liquidity Surge

The Reserve Bank of India (RBI) could face a bill of about $10.6 billion for its efforts to support a record mobilisation of dollar deposits from the Indian diaspora, while simultaneously grappling with a sharp increase in banking-system liquidity, as per a report by Bloomberg.

Banks raised $127.23 billion through the special Foreign Currency Non-Resident (Bank), or FCNR(B), deposit window, significantly exceeding the RBI’s earlier estimate of $80 billion.

Including inflows from overseas foreign-currency debt and external commercial borrowings, total funds attracted through the measures reached $136.38 billion, the RBI said on Wednesday.

The RBI had offered to shield banks from the currency-hedging costs associated with the deposits through a favourable swap facility.

The arrangement is estimated to cost around 3%-3.5% annually over three to five years. The central bank must also manage the additional rupee liquidity created when banks exchange their dollar proceeds with the RBI, as per the report.

Potential Cost And Fiscal Risks

An analysis by Madhavi Arora, economist at Emkay Global Financial Services, estimated that the combined cost of the hedging support and liquidity operations could reach ₹1.2 lakh crore over five years, the BBG report said.

The cost could, however, be partly offset by returns from investing the dollar funds overseas.

Gaura Sengupta, economist at IDFC First Bank, said, “On a net basis, per year cost could be as low as 100 billion rupees, or even marginally positive for the RBI," as per BBG.

The potential cost could affect the RBI’s dividend to the government, which received a record ₹2.87 lakh crore transfer from the central bank in May.

Any significant reduction could complicate the government’s efforts to meet its fiscal targets, it added.

RBI Weighs Ways To Absorb Surplus Liquidity

The scale of the inflows has also created a liquidity-management challenge. The banking system’s surplus liquidity has risen to a record ₹9.70 lakh crore, prompting market participants to assess how the RBI could prevent the excess funds from contributing to inflationary pressures, as per a report by Reuters.

The central bank could consider longer-duration variable rate reverse repo (VRRR) operations, allowing banks to withdraw funds before maturity.

Another option could be shorter-tenor dollar-rupee sell-buy swaps, with Emkay’s Arora estimating that the RBI could take delivery of around $32 billion from its forward book due to mature over the next year, per Reuters.

The RBI could also consider reviving the Market Stabilisation Scheme, through which the government sells short-term Treasury bills to absorb liquidity.

A temporary increase in the cash reserve ratio (CRR) is another possibility. Market participants estimate that a 50 basis point increase could withdraw around ₹1.4 lakh crore, while a 100 bps increase could absorb about ₹2.8 lakh crore, the Reuters report said.

Open market bond sales could provide another avenue, although such sales could push up bond yields, it added.