economy · 2026-10-17
Banks borrow less as RBI money flood eases cost
Photo: via The Economic Times
Indian banks cut short-term borrowings by ₹1.3 lakh crore in a month because the RBI pumped extra cash into the system. This lowers their costs for now, but rates may rise again soon.
What is a certificate of deposit?
A certificate of deposit (CD) is a short-term IOU that a bank sells to other institutions to borrow money quickly, usually for 3 to 12 months. It promises to repay the amount plus interest at maturity. Banks use CDs when they need cash for lending faster than deposits can come in.
Where did the RBI get the rupees it handed out?
The rupees came from dollars banks raised overseas under a special RBI window. Banks swapped those dollars for rupees with the RBI, which injected about ₹11.2 lakh crore into the banking system, flooding it with cash.
Who gains when bank funding costs fall?
Banks gain, which can support profitability and let them lend more. When their funding costs fall, they can borrow and lend more cheaply, improving margins and the pool of deposits available for lending. The benefit to borrowers is limited, though, as rates rise again soon.
What happens to lending when the surplus drains?
When the surplus drains, cheap money disappears and borrowing costs rise, so banks start issuing CDs again at higher rates. The relief was temporary: it gave banks a month of cheaper funding in exchange for higher rates ahead, with the market already pricing in an October rate hike as the RBI sells bonds to absorb cash.
Why did banks stop issuing CDs so suddenly?
Because the RBI flooded the system with cheap rupees. Banks swapped dollars raised overseas for rupees through a special FCNR(B) window, and system liquidity surged to about ₹11.2 lakh crore in early September. With that cash sitting idle, paying 6-7% on new CDs made no sense, so banks let maturing CDs expire instead of replacing them.
Is 19% in one month a normal drop?
Yes, for this situation. A 19% plunge in one month is unusually steep, not a routine monthly dip. But it had a clear cause: the Reserve Bank of India's special window let banks swap foreign dollars for rupees, flooding the system with about ₹11.2 lakh crore. Facing that surplus, banks simply let their costly CDs expire instead of replacing them.
Why can't banks keep using this cheap window?
Because the window is closing. The RBI has started absorbing the extra cash by selling government bonds, draining the surplus. At the same time, markets are pricing in a possible rate hike at the October review, so short-term rates have begun to climb again. The cheap reprieve was temporary.
Why would the RBI pull cash back out just after flooding the system?
The RBI's FCNR(B) swap, a foreign-currency deposit scheme, created a surplus of roughly ₹15 trillion, which can push inflation up and tempt banks into risky dependence on cheap money. Analysts expect two rate hikes by December 2026, and the RBI is already selling bonds and running reverse repo auctions to absorb cash, aiming to withdraw an extra ₹4 lakh crore.
Source: economictimes.indiatimes.com