RBI Governor Sanjay Malhotra Expects Surplus Liquidity to Drain Within FY27

Surplus liquidity in India's banking system is set to be largely absorbed within the current financial year (FY27), Reserve Bank of India (RBI) Governor Sanjay Malhotra stated during the post-monetary policy press conference. The announcement followed the Monetary Policy Committee's (MPC) decision to raise the benchmark repo rate by 25 basis points to 5.50 percent and revise its policy stance to "calibrated tightening".

The central bank chief emphasized that elevated liquidity conditions are temporary and will ease through a combination of active monetary interventions and natural market mechanisms, rather than abrupt regulatory moves.

Drivers Behind the Liquidity Rebalancing

Systemic liquidity had expanded considerably over August and September, primarily driven by strong capital inflows under foreign currency non-resident (FCNR(B)) deposit schemes and foreign exchange operations. The average daily net absorption under the Liquidity Adjustment Facility (LAF) reached ₹5.9 lakh crore following the August MPC meeting, after peaking above ₹11 lakh crore in early September.

Governor Malhotra detailed the channels expected to drain excess liquidity over the second half of FY27:

• Currency Leakage: Increased physical currency demand from the public during the ongoing festive and wedding seasons.
• Active Open Market Operations (OMOs): Continued bond sales to durably extract rupee liquidity from banks.
• Forex Market Interventions: Utilization of sell-buy currency swaps and spot operations to manage rupee volatility.
• Variable Rate Reverse Repo (VRRR) Auctions: Periodic short-term and term auctions to soak up idle balances.
• Credit Offtake and Tax Outflows: Corporate credit expansion and scheduled advance tax collections absorbing institutional cash reserves.

Reluctance on Cash Reserve Ratio Hikes

Addressing speculation regarding potential quantitative tightening measures, Malhotra clarified that hiking the Cash Reserve Ratio (CRR) remains among the RBI's least preferred mechanisms. While not ruling out any tool amid evolving economic conditions, the central bank favors conventional, market-based operations.

The primary operational challenge for the RBI in the near term remains steering the Weighted Average Call Rate (WACR) back into close alignment with the policy repo rate. Heavy systemic cash has kept interbank overnight borrowing rates depressed, occasionally softening transmission of policy rate actions.

Caution on FCNR(B) Inflows

Governor Malhotra also cautioned domestic lenders regarding rapid deployment of large foreign-currency deposit inflows. Urging banks to uphold rigorous credit diligence rather than accelerating overnight asset growth, he noted that credit discipline must remain intact as banking system liquidity normalizes toward 0.5 to 1 percent of Net Demand and Time Liabilities (NDTL) by March 2027.

Tags: RBI Sanjay Malhotra Monetary Policy Committee Indian Banking Liquidity OMO