A largely benign outlook for inflation amid a slump in demand, slowdown in credit growth, a sharply positive balance of payments and lessons from the RBI’s own cash-tightening three years ago suggest that this amount of cash — which exceeds the level seen after a surprise cash ban in late 2016 — will be the new normal for the next few months.

“I don’t think this liquidity is moving away in a hurry,” said Ritesh Bhusari, deputy general manager for treasury at South Indian Bank. “Unlike demonetisation, which was the fallout of an economic policy decision, excess liquidity this time is a creation of the central bank. It may stay for the next six months.”

The liquidity measures taken by the RBI since February aggregate to 9.57 trillion rupees, or about 4.7% of gross domestic product. That pushed up the excess cash banks park with the authority to more than 8 trillion rupees in May.

Liquidity Glut

The central bank’s management of the liquidity glut came into focus this month when Governor Shaktikanta Das for the first time spoke about the need for a careful strategy to exit from the extraordinary monetary stimulus. To be sure, he made it clear that it was not imminent.

The situation has drawn parallels to late 2016 when Prime Minister Narendra Modi’s shock high-value cash ban led to a surge in deposits with banks. As liquidity rose in 2017, the RBI began open-market sale of bonds, mopping up about 900 billion rupees.

This time around, the authority needs the excess liquidity to induce banks to absorb the government’s blowout bond supply.

Bloomberg Economics expects a record $95 billion surplus on the balance of payments in fiscal 2021. That would largely be met by forex purchases to prevent rupee from gaining further.

Net FX purchases of $80 billion in fiscal 2021 would lead to a 6 trillion-rupee liquidity injection into the system, which has already been running a record surplus since the start of the fiscal year, according to Abhishek Gupta, India economist at Bloomberg.