India’s banking system is sitting on its largest cash surplus in recorded history — ₹11 trillion (approximately $115 billion) in excess rupee liquidity — and the Reserve Bank of India is deploying short-term sell-buy foreign exchange swaps on Wednesday to begin pulling that cash back, according to market participants who spoke to Reuters and Bloomberg on condition of anonymity.
The cash overhang traces directly to a foreign deposit scheme that worked far beyond anyone’s expectations. When the RBI launched a special window in June to attract foreign-currency deposits from overseas Indians, it hoped for around $80 billion in inflows. What arrived was a record $136.4 billion — more than 60% above target — and when those dollars were swapped for rupees, the banking system was left awash in cash it cannot easily spend down.
A Scheme That Exceeded All Expectations
On June 8, 2026, the RBI launched a concessional swap facility allowing Indian commercial banks to accept Foreign Currency Non-Resident (Bank) — or FCNR-B — deposits at unusually attractive interest rates of up to 7%, in some cases. FCNR-B accounts are fixed-term foreign currency deposits held by non-resident Indians and persons of Indian origin. Unlike standard NRI accounts, these deposits stay in the original foreign currency — typically US dollars — so the depositor never takes on rupee exchange-rate risk.
What made the 2026 scheme unusual was that the RBI agreed to absorb the hedging cost that banks would normally pay to convert those dollars into deployable rupees. That eliminated the banks’ exposure to currency swings, making the offer significantly more compelling than anything the market had seen in years. By comparison, a similar window in 2013 attracted $26 billion in FCNR-B deposits.
The response was so strong that the RBI closed its FCNR-B window on August 31 — a full month before its original September 30 deadline — after banks had already raised $127.2 billion through these deposits alone, with an additional $9.2 billion arriving through external commercial borrowings and overseas foreign currency borrowings. The total: a confirmed $136.4 billion.
How the Surplus Was Created
The mechanics of how this success became a monetary policy problem are straightforward. When an overseas depositor converts dollars into a bank’s FCNR-B account, the bank swaps those dollars with the RBI under the concessional facility. In that swap’s near leg, the RBI pays rupees to the bank — and those rupees flow directly into India’s interbank banking system.
Do this at a scale of $127 billion, and the result is a rupee injection of historic proportions. Banking system liquidity hit a record ₹9.71 trillion (approximately $102 billion) as of September 2, 2026 — the highest ever recorded, surpassing the ₹9.21 trillion (approximately $96 billion) recorded in September 2021 following post-COVID government spending. By Wednesday, multiple market estimates put the surplus closer to ₹11 trillion (approximately $115 billion), according to market participants.
Gaura Sen Gupta, chief economist at IDFC FIRST Bank, calculates an even larger “core liquidity surplus” — a broader measure that captures items the standard interbank metric excludes — of ₹14 trillion to ₹15 trillion (approximately $146 billion to $157 billion).
RBI Governor Sanjay Malhotra had flagged this outcome as early as August 5, when he told reporters the surplus would peak around September before being absorbed over time through the economy’s natural demand for currency, rising cash reserve requirements from deposit growth, and the maturation of existing forward contracts.
How the Swap Mechanism Works
An FX sell-buy swap is, at its core, a repurchase agreement using foreign currency as collateral rather than government securities. In Wednesday’s operations, the RBI sold US dollars to commercial banks at the prevailing spot exchange rate, simultaneously agreeing to buy those same dollars back at a future date.
The near leg of the transaction — the spot sale — removes rupees from the banking system immediately: the banks hand over cash to pay for the dollars. The far leg — the forward repurchase — returns those rupees when it settles. Wednesday’s operations covered two tenor buckets, with swaps maturing in both September and October 2026, according to market participants. Three market participants estimated the total across both maturities at approximately $1 billion, though the RBI did not officially confirm the size.
The operations had an immediate and visible effect on the USD/INR forward curve. September rupee forward premiums rose by approximately 2.5 paisa, while October premiums climbed by around 4 paisa, according to market participants. The logic is mechanical: when the RBI commits to repurchasing dollars at a forward date, it creates additional demand for forward dollars and supply for spot dollars, pushing short-dated forward premiums higher. Currency traders read this signature as confirmation that the central bank was active in the swap market.
Source: Techtimes