India’s cash surplus falls 61% as short-term borrowing costs climb

Banks brought $143.6 billion into India under a swap window the Reserve Bank of India (RBI) opened on 8 June, and the RBI paid for the dollars it took in rupees. By 6 September banks had ₹11.16 lakh crore of spare cash parked with the central bank, the largest surplus in rupees in daily figures that begin in February 2020; by 1 October 61% of it was gone. The three-month treasury bill sold on 30 September at 5.52%, compared with the RBI’s 5.50% overnight lending rate. The comparison is a sign of the difference between overnight and term funding, not a breach of a ceiling on three-month yields.

The reserves fall and industry’s hidden import exposure traced the pressure on companies’ costs through imported inputs and Indian suppliers. The next part of that story is domestic finance: the same businesses may have to fund working capital and replace short-term debt as banks’ surplus cash contracts. The two exposures can meet in a company’s cash flow, but they are different channels.

For companies refinancing within a year, the immediate question is what replacing maturing debt will cost. Three-month certificates of deposit, the paper banks sell to raise cash, yielded 6.45% on 25 September: 61 basis points above their low of 4 September, though only 5 above their level of 27 August. On 1 October, 1,983 commercial-paper issues were outstanding across 259 issuers; 1,307 of them, 66% by number of issues, fall due by the end of December and must be repaid or refinanced. The amount of money falling due cannot be inferred from the issue count. In the latest annual accounts of 822 listed companies outside finance, a third of all borrowing, ₹13.77 lakh crore, was due within a year.

Where the rupees came from

The window let banks swap dollars with the RBI on concessional terms when the dollars came from fresh foreign-currency deposits of Indians abroad, or from banks' and companies' borrowing overseas. It drew $20.7 billion by 17 July and $56.8 billion by 13 August. On 14 August the RBI said the window for deposits would shut on 31 August, a month early. In the 18 days that followed $79.5 billion arrived, $4.4 billion a day. The total reached $143.6 billion by 18 September, 93% of it deposits.

Each dollar swapped became rupees in a bank's account at the RBI; at the rate of 18 September the $143.6 billion is worth ₹13.76 lakh crore. The RBI's foreign currency assets rose $107.1 billion between 26 June and 4 September, $47.5 billion of it in the final week, the largest weekly rise in figures that begin in December 2012. Over the same ten weeks banks' surplus with the RBI rose by ₹11.16 lakh crore. Bank deposits grew ₹9.30 lakh crore, or 3.5%, in August alone.

The cash reached a market where money had been tight. On 3 June three-month certificates of deposit yielded 7.42%, 217 basis points above the RBI's repo rate of 5.25%, and the central bank was lending to banks at auctions as late as 29 July. By 4 September the same certificates yielded 5.84%.

How the RBI is taking them back

The RBI began taking cash in on 6 August, at auctions where banks lend it money for days at a time. It has held 51, and at 47 banks offered less than it asked for. Every one cleared at 5.24%, a basis point under the repo rate. Participation was especially low in the longer auctions. At three auctions of 15 to 30 days the RBI asked for ₹18 lakh crore and was offered ₹4.54 lakh crore, a quarter. At the last, on 11 September, it asked for ₹5 lakh crore for 26 days and was offered ₹60,449 crore.

The same day it announced a step that does not unwind in days: selling government bonds outright. It sold ₹1 lakh crore of bonds maturing between 2028 and 2032 on 17, 21 and 28 September, against bids of ₹2.19 lakh crore. A 2029 bond that went at 6.60% in the first sale went at 6.67% in the third.

Reserves fell $38.1 billion in the three weeks to 25 September, the reversal examined in the earlier article. Spot dollar sales withdraw rupees unless offset, but a reserves decline also contains valuation changes and is not a measure of rupees withdrawn. Bond sales, government cash balances and currency demand can also change the surplus. The available evidence does not allocate the decline among them. By 1 October the surplus was ₹4.38 lakh crore, 1.6% of bank deposits.

Short-term rates are rising

Overnight money has been cheap for two months. Banks have lent to each other below the repo rate on every trading day since 31 July, 47 in a row. In the tri-party repo market, where mutual funds lend against government bonds, the rate has been below the 5.00% the RBI pays banks on spare cash on 74 of 220 trading days since December, and it averaged 4.79% in September.

Banks can leave spare cash with the RBI; mutual funds and company treasuries cannot access that facility on the same terms. The available comparison links the surplus more usefully to tri-party repo rates than to interbank call rates. It does not establish that the cash drain caused the subsequent rise in term yields.

Beyond overnight, yields have risen, and short ones more than long ones.

The gap between ten-year and one-year yields narrowed from 111 basis points to 102, and between thirty-year and one-year from 171 to 150. The largest rise was at four to five years, inside the stretch of the curve the RBI was selling.

Higher bill yields do not, by themselves, establish a shortage of cash across the banking system. Between 27 August and 25 September the one-year bill rose 27 basis points and the one-year swap rate, the fixed rate exchanged for the overnight rate, rose 28. At 6.17%, the swap rate stood 95 basis points above the referenced overnight rate. This is consistent with a repricing of future overnight funding, but swap rates also contain premia; the comparison does not isolate a policy-rate forecast. With a surplus as large as on the day of that auction, the three-month bill has been this far above the repo rate at four of 102 earlier weekly auctions: the four that followed the RBI's rate rise of 4 May 2022.

Not all of this is India's doing. Over the same five weeks the U.S. ten-year yield rose 51 basis points to 5.24%, and Brent crude went from $89 to $98 a barrel after touching $108 on 11 September. But the U.S. curve steepened: its ten-year yield's gap over the one-year widened from 58 basis points to 80. India's narrowed. The contrast is in the shape of the move: India’s short yields rose more than its long yields. It does not identify how much of the increase came from domestic liquidity rather than global rates, inflation or policy expectations.

The previous tightening cycle provides context, rather than a forecast for this one. Between May 2022 and February 2023 the repo rate rose 250 basis points, the one-year yield 247 and the ten-year 26; the gap between them fell from 232 basis points to 12. Today's 102 is still wider than at 115 of the 159 month-ends since April 2013. Since March 2020 a larger surplus has gone with a wider gap month by month, with a correlation of 0.92, but the surplus and the rate cuts arrived together, and over three-month changes the two moved the same way only 17 times in 25.

Who funds at the short end

Commercial paper is the purest case. Of the 1,983 papers running, 94% carry the top short-term rating, and the middle one runs for 95 days. In October 307 fall due, in November 493 and in December 507; the busiest week begins on 3 December, with 176 papers of 101 issuers. The list gives no amounts.

Brokers and finance companies feature prominently by number of issues. ICICI Securities has 2.6% of the papers, HDFC Securities 2.5%, Godrej Industries 2.3%, IIFL Finance 2.2%, and Kotak Securities and Bajaj Financial Securities 2.1% each. Of the 259 issuers, 144 could not be tied to any exchange-listed company; the unmatched group accounts for 58% of the issues. An unmatched identity does not, on its own, establish whether the issuer is listed or unlisted. Issuing and paying-agent roles are concentrated: HDFC Bank is issuing and paying agent for 36% of it and ICICI Bank for 25%, and 254 of the 259 issuers use one bank only in this list. An agency role is an operational connection, not evidence that the bank funds or guarantees those issues.

Banks' own certificates of deposit number 415, from 37 banks and institutions, and half fall due within 90 days. State-owned banks have the most: Union Bank of India 8%, Canara Bank and Bank of Baroda 7% each.

Companies' accounts put a rupee figure on the exposure. In their latest annual accounts, to March 2026 for 402 of them and March 2025 for 413, the 822 listed companies outside finance that carry debt owed ₹42.11 lakh crore, of which ₹13.77 lakh crore was due within a year. If those short-term balances stayed unchanged and their financing rate were one percentage point higher for a full year, the additional cost would be ₹13,766 crore: 1.1% of combined profit before tax and 4.0% of recorded finance costs. This is a sensitivity calculation, not a forecast of the amount that will reprice or of future rates. For the company in the middle it is 0.9% of profit. For one in ten it is 5.9% or more, and 75 of the 822 had finance-cost cover below one.

The twelve companies below had the most commercial paper in those accounts among the 206 largest borrowers; they are shown by its share of their borrowings.

The table uses group accounts, some including finance arms; a company with a loss before tax has no share of profit to show. Finance-cost cover is profit before tax plus finance costs, divided by finance costs; finance costs can be broader than interest alone. The aggregate sample mixes reporting years and can include overlapping corporate groups, so its totals are not an economy-wide debt measure. The scenario holds reported short-term balances fixed for a full year. In real estate 57% of borrowing was due within a year and among drug makers 55%; among power companies it was 19%. One point costs real estate companies 2.5% of profit, makers of cement and other mineral products 2.2%, power companies 1.7% and oil refiners 1.0%.

What each side has to decide

An issuer with paper falling due can repay it from cash, replace it at the going rate, or borrow for longer. As a group the 822 companies held ₹16.31 lakh crore of cash and liquid investments, more than their short-term borrowings, though not company by company. Banks choosing where to deploy cash face different rates and maturities: the RBI's auctions pay 5.24% for days, a one-year bill pays 6.18%, and new loans averaged 8.61% in August. Low participation in the 26-day auction showed limited appetite to lock cash away at its offered rate. For overnight lenders, the liquidity outlook matters alongside the policy decision. The RBI has to decide how much more to remove and by what means: the surplus is still ₹4.38 lakh crore, and the window stays open until 31 December for banks' and companies' foreign borrowing.

Still, banks' own borrowing is cheaper than before the dollars came: three-month certificates of deposit at 6.45% cost 97 basis points less than on 3 June. What banks charge has not followed: their one-year lending benchmark, at the middle bank, was 8.61% in September against 8.50% in June. Measured against deposits, September's peak of 4.0% was below the 5.9% reached in September 2021. And the rupee, 95.62 to the dollar on the day the window opened, was 95.99 on 1 October.

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