India banking cash glut opens up arbitrage for lenders

Core Insights - Overnight money market rates have significantly decreased following an influx of cash into the banking system by the Reserve Bank of India (RBI), creating an arbitrage opportunity for banks [1][8] - The tri-party repo rates have fallen below the RBI's Standing Deposit Facility rate of 5%, with the spread widening to 34 basis points recently and reaching 75 basis points last week [1][8] - The amount of money banks are parking with the RBI surged to a record Rs 5 lakh crore, up from Rs 1.4 lakh crore just two weeks prior, indicating a substantial increase in banking liquidity [3][8] Banking Sector Dynamics - The current liquidity surplus is the largest seen in six months, contrasting with a tight liquidity situation just two months ago [8] - Analysts are questioning whether the RBI is intentionally allowing easier financial conditions to facilitate the transmission of previous rate cuts to the broader economy [8] - Banks are reportedly utilizing the excess liquidity for profitable arbitrage rather than extending credit to businesses, which may undermine the RBI's efforts to boost lending [1][8] Future Expectations - It is anticipated that rates will rise by the end of February as liquidity tightens due to tax outflows, with conditions expected to remain strained in March, coinciding with the close of the financial year [8]