The asset on the other side of the entry

Indian bank deposits grew 17.8 per cent in the year to the end of August, past the 15.4 per cent of a month earlier and the fastest in a decade. In the fortnight to 31 August alone banks took in a net 9.4 trillion rupees, lifting the stock to 278.7 trillion rupees against 223.9 trillion rupees of credit. Credit growth did not keep step: it eased to 19.1 per cent from 19.4 per cent.[1]

Start by dropping the picture in which a bank collects savings and then lends them out. The counterpart here is easy to name: overseas Indians placed 126 billion dollars in foreign-currency deposit accounts in about two and a half months, through a window RBI opened to attract dollars. RBI governor Sanjay Malhotra put 48.5 per cent of that money at five years and 42 per cent at three. The rupee that turns up in the domestic system sits opposite a foreign-currency liability on the bank's books; no domestic loan created these deposits. Local mobilisation stayed hard, with Indian savers moving to market-linked products. One counter-reading deserves a hearing: local deposits could have grown underneath and been masked by the size of the inflow. The timing argues against it: the jump from 15.4 per cent to 17.8 per cent arrived with the window rather than with credit.[1]

Surplus reserves, dearer duration

The same money shows up in the money market as a surplus. The banking system's daily average surplus runs at 10.25 trillion rupees in September, against 3.67 trillion rupees in August and 1.07 trillion rupees in July. On Friday RBI accepted 45.05 billion rupees of bids in the 6.20 per cent 2029 bond against 110 billion rupees notified, at a cut-off of 6.40 per cent. The benchmark 10-year closed at 7.02 per cent from 6.97 per cent, five basis points higher and the most since June.[2]

A surplus of reserves and a bid for duration are two different demands, and the auction separates them. Bidders asked for a yield the central bank declined to pay, so it took 40 per cent of the notified amount and left the rest on the table. The price of long duration tracked Brent around 105 dollars a barrel and a US 10-year yield at 4.95 per cent, and an overnight balance reaches neither. Alok Singh, head of treasury at CSB Bank, said the excess liquidity is capping the rise in yields. A second reading is possible: debt management could simply prefer not to lock in a higher coupon, in which case the cut in the accepted amount says little about the liquidity position.[2]

Which balance sheet is carrying it

One flow, two ledgers. The inflow that made deposit growth the fastest in a decade is the same inflow that leaves RBI draining a 10.25 trillion rupee daily surplus, and it carries a maturity the banking system did not choose: 48.5 per cent of it at five years, 42 per cent at three. A credit-deposit ratio of 80.32 per cent looks comfortable while the liability behind it is written in dollars and dated.[1], [2]

There is an observable test. If the daily average surplus falls back towards the 3.67 trillion rupee August average while the deposit stock stays near 278.7 trillion rupees, the drain rather than the inflow is setting the money-market rate, and the 7.02 per cent close stops being a story about oil and global yields alone. The thing to watch is the amount RBI accepts at its next auctions against the notified amount: a second cut on the scale of Friday's could point to a central bank defending a level rather than managing a liquidity position.[1], [2]