RBI Must Drain Rs 6-7 Lakh Crore Surplus Liquidity Urgently: HSBC

The Reserve Bank of India must act swiftly to drain between Rs 6 lakh crore and Rs 7 lakh crore of surplus liquidity from the financial system within a fortnight, according to Pranjul Bhandari, chief India economist at HSBC. Strong inflows of foreign currency non-resident deposits have exceeded market estimates, creating significant liquidity pressures that threaten monetary policy transmission.

Bhandari has recommended that the RBI employ either a cash reserve ratio hike or strategic dollar sales to manage the excess liquidity effectively. The timing is critical, as prolonged surplus liquidity could complicate the central bank's efforts to maintain appropriate monetary conditions and support its inflation management objectives.

Foreign currency deposits have surged beyond expectations, driven by global interest rate differentials and India's relative economic resilience. These inflows have created challenges for liquidity management as the RBI seeks to balance its dual mandate of price stability and growth support.

The RBI has multiple tools at its disposal to address the situation, with the cash reserve ratio representing one of the most direct mechanisms for absorbing liquidity. Alternative measures such as open market operations or foreign exchange interventions could also play a supporting role in rebalancing the system.

Experts say the central bank's response in the coming days will be closely watched by markets and policymakers as an indicator of the RBI's commitment to maintaining orderly liquidity conditions amid changing capital flow dynamics.