RBI is Flooding the Financial System with Cash

India’s move to rein in rupee gains and rebuild foreign-exchange reserves is flooding the financial system with cash, driving bank funding costs to a 10-month low.

The three-month interbank lending rate fell 87 basis points this quarter to 8.90 percent on May 26, exchange data show. A similar gauge in China is at 5.02 percent. The currency stockpile jumped $40 billion from a three-year low in September to $315 billion, and Nomura Holdings Inc. estimates the central bank’s dollar purchases pumped about 800 billion rupees ($13.6 billion) into markets in the four months through April.

Reserve Bank of India Governor Raghuram Rajan is boosting reserves as U.S. stimulus cuts threaten to spur fund outflows from emerging markets. Falling funding costs may help new Prime Minister Narendra Modi revive growth in Asia’s third-largest economy from close to a decade-low and improve public finances.

Bloomberg

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