From ₹10 lakh crore to almost zero: India's bank cash squeeze, explained

On 7 October, the RBI raised the repo rate to 5.50%. That's the headline number. But a second, quieter tightening has been running alongside it: the cash sloshing around India's banks has almost disappeared.

In early September, banks were sitting on a surplus of nearly ₹10 lakh crore. On 22 October it was down to just ₹542 crore, the lowest since late June. Here's what happened, and why it matters as much as the rate hike.

What "liquidity" means

Every day, some banks have more cash than they need and others are short. They lend to each other overnight, mostly in the "call money" market. When the system as a whole has spare cash, banks park it with the RBI. When it's short, they borrow from the RBI.

The RBI keeps these overnight rates inside a corridor. The floor is the Standing Deposit Facility (SDF) rate, now 5.25%, what the RBI pays on spare cash. The ceiling is the Marginal Standing Facility (MSF) rate, 5.75%, what it charges for emergency loans. The repo rate, 5.50%, sits in the middle. See our repo rate explainer for the basics.

From flood to drought

The flood came first. Under a special RBI scheme, banks raised about $127 billion in FCNR(B) deposits from non-resident Indians by 31 August, and $136 billion including other foreign borrowing, according to Jefferies. When those dollars were converted, rupee liquidity ballooned.

Too much cash pulls short-term rates below the repo rate, which works against a central bank trying to fight inflation. Since the August policy, the weighted average call rate had averaged 14 basis points below repo. So the RBI started draining money: it sold ₹1 lakh crore of government bonds in September, ran reverse repo auctions, and, after the rate hike, required banks to keep at least 99% of their 3% cash reserve ratio (CRR) with it every day, up from 90%, from 16 October. That was last required in 2013.

Then the drains opened on their own. GST payments and state borrowing pulled money out. The RBI sold dollars to steady the rupee, which takes rupees out of the system. And during the festive season, people withdraw cash.

Rates jumped above the repo rate

With cash scarce, banks bid up the price of overnight money. The weighted average call rate went from 5.31% on 9 October, below repo, to above 5.8% in mid-October, and was about 5.67% on 26 October. According to an ICICI Bank report, the weekly average call rate in the week to 23 October rose to 5.70% from 5.48% the week before, and the market repo rate to 5.66% from 5.37%.

In effect, overnight borrowing became costlier than the 5.50% repo rate, a tightening on top of the hike.

The RBI turns lender again

A call rate drifting toward the 5.75% ceiling is more tightening than the RBI wants. So, weeks after mopping up cash, it started putting some back through variable rate repo (VRR) auctions, where banks borrow for a few days against government bonds.

That's about ₹3.5 lakh crore allotted across four auctions in eight days (FIN2DAY calculation; short-term loans that roll off, so they don't add up to a permanent infusion). Demand was strong: on 22 October banks bid over ₹1.6 lakh crore for a ₹50,000 crore auction, and on 26 October they sought ₹1.87 lakh crore against ₹1.5 lakh crore on offer.

What it means for you

• LoansRepo-linked loans move with the policy rate, not daily liquidity. Several banks raised these rates by 0.25 percentage points from 8 October; PNB's went from 8.10% to 8.35% and Bank of Baroda's from 7.90% to 8.15%. Read why the RBI hiked.
• DepositsWhen banks are short of cash, they compete harder for deposits. Tight liquidity tends to push up rates on bulk and certificate deposits first, and retail FD rates later.
• BondsTight cash adds to pressure on bond yields. The government's average borrowing cost at its latest auction rose 20 basis points to 7.60%, per ICICI Bank.

What to watch

Economists expect liquidity to stay tight through the festive season. IDFC First Bank's Gaura Sengupta sees the core surplus falling to about ₹1 lakh crore by March 2027. Government spending at month-end and maturing bonds should bring some relief. The signal to watch is the call rate: if it stays well above 5.50%, expect more VRR auctions. Educational content only, not investment advice.