India’s banking system is facing an unprecedented liquidity surplus, with excess funds reaching a record ₹9.7 lakh crore ($102.67 billion) on September 3, 2026. The latest level has surpassed the previous peak of around ₹9.2 lakh crore recorded in September 2021, highlighting the extraordinary amount of money currently available across the banking system.
The sharp increase has been driven primarily by a massive inflow of foreign currency through the Reserve Bank of India’s (RBI) special Foreign Currency Non-Resident (Bank), or FCNR(B), deposit scheme. Indian banks mobilised approximately $127.23 billion through the programme, with most of the foreign currency subsequently swapped with the RBI for rupees. That process has injected a substantial amount of rupee liquidity into the domestic banking system.
FCNR deposits become the biggest driver of liquidity
The RBI introduced the special FCNR(B) swap facility in June as part of measures aimed at attracting foreign currency and strengthening India’s external position. The programme received a far stronger response than policymakers initially anticipated.
By August 31, banks had mobilised about $127.23 billion through FCNR(B) deposits. Including external commercial borrowings and overseas foreign-currency borrowings, total foreign-currency mobilisation under the related measures reached approximately $136.4 billion.
The foreign currency was then swapped with the RBI, resulting in a large increase in rupee liquidity. This explains why the banking system has moved so rapidly from a comfortable surplus to an unprecedented liquidity glut.
The scale of the inflows was so large that the RBI closed the FCNR(B) mobilisation window on August 31, around a month earlier than originally planned. The decision reflected the unexpectedly strong demand and the need to manage the consequences of accumulating foreign-currency liabilities.
RBI now faces a “problem of plenty”
The record liquidity surplus creates a new challenge for the RBI. Normally, the central bank adds or removes liquidity to keep short-term money-market rates aligned with its policy objectives.
With nearly ₹10 lakh crore of excess liquidity in the system, however, banks have substantially more funds than they immediately need. This can push overnight interest rates lower and potentially move them away from the RBI’s desired operating level.
The RBI has already started using Variable Rate Reverse Repo (VRRR) operations to absorb some of the excess funds. Banks can place surplus money with the central bank through these operations, allowing the RBI to temporarily remove liquidity from the market.
Reuters reported that the central bank could need a broader combination of tools, including longer-duration VRRR auctions, foreign-exchange sell-buy swaps and potentially other sterilisation measures, to manage the liquidity surplus.
What happens to interest rates and bank funding?
The liquidity glut is already affecting short-term money-market rates. The weighted average call rate, an important measure of overnight borrowing costs and the RBI’s operating target, has moved lower as excess funds have accumulated.
For banks, the situation can be positive in the short term because abundant liquidity reduces their need to rely on expensive wholesale funding. Banks can use the additional funds to replace higher-cost bulk deposits and certificates of deposit.
The Financial Express reported that three-month certificate-of-deposit rates had fallen significantly, while banks were already using FCNR(B) funds to reduce their dependence on these sources of funding. Some banks expect the change to reduce their overall cost of funds and support margins.
However, the surplus could also intensify competition for lending. With banks holding large amounts of deployable funds, lenders may become more aggressive in offering loans, potentially putting downward pressure on lending rates and net interest margins.
RBI may need to absorb liquidity for longer
The RBI’s challenge is that simply using short-term operations may not be enough if the surplus remains elevated for several months.
Reuters reported that the central bank could consider several options, including longer-term VRRR operations, foreign-exchange swaps, government Treasury-bill sales under the Market Stabilisation Scheme, changes to the Cash Reserve Ratio and open-market bond sales.
A CRR increase would force banks to hold a larger proportion of deposits with the RBI, directly removing some liquidity from circulation. However, such a move could affect banks’ lending capacity and profitability, making it a more significant policy decision.
The RBI also expects some of the surplus to naturally disappear. Higher cash withdrawals during the upcoming festive season, maturing foreign-exchange forwards and possible RBI intervention in the currency market could gradually absorb part of the excess liquidity.
Record liquidity comes with longer-term challenges
The FCNR(B) programme has strengthened India’s foreign-exchange position, but the deposits also represent future liabilities because much of the money is locked in for several years. India’s foreign-exchange reserves had reached a record $729.33 billion by August 21, helped by the large inflows.
For now, the immediate impact is a banking system awash with cash. The record ₹9.7 lakh crore surplus gives banks greater funding flexibility and could support credit growth, but it also puts the RBI in the unusual position of having to actively absorb liquidity rather than inject it.
The coming months will therefore be closely watched. If the surplus remains unusually high, the RBI may have to rely increasingly on longer-duration and more permanent liquidity-management tools to prevent short-term rates from falling too far and to keep monetary conditions aligned with its inflation and growth objectives.
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