The Indian banking system has recently entered a paradoxical phase where liquidity appears abundant on paper, yet banks face a structural crunch in stable, low-cost deposits. While households have pivoted toward debt-based consumption and shifted their savings away from traditional bank deposits, the system has not run dry. Instead, a complex mechanism of foreign-currency swaps and institutional inflows has kept the wheels turning, even as the Reserve Bank of India (RBI) periodically steps in to suck out the excess.

Much of this liquidity arrived through the RBI’s strategic FCNR(B) swap programme. To bolster foreign exchange reserves, the RBI encouraged banks to attract non-resident Indian (NRI) deposits in foreign currencies. The banks then swapped these dollars with the RBI in exchange for rupees. This process injected a massive amount of rupee liquidity into the banking system, providing a buffer that offset the decline in domestic household savings.

However, this liquidity is not a permanent windfall. The FCNR(B) swap facility has specific windows and limits, and the window for those particular deposits closed on August 31. Consequently, the surplus liquidity observed in October and November 2026 is largely a “carry-over” from these earlier mobilisations, rather than a sign of a new, sudden wave of remittances from Indians returning from abroad.

The RBI manages this surplus through daily liquidity operations to prevent the economy from overheating or the rupee from becoming too volatile. When the RBI “sucks” liquidity, it uses tools like the Standing Deposit Facility (SDF) or Variable Rate Reverse Repo (VRRR) operations. These operations essentially allow banks to park their excess cash with the RBI in exchange for a set interest rate.

In early November 2026, these operations were highly active. For instance, on November 2, the RBI absorbed nearly ₹1.9 lakh crore through the SDF. This figure often confuses observers because it represents a daily operation; it does not mean ₹1.9 lakh crore of fresh money entered the system that day, but rather that banks had that much surplus cash they were willing to park with the central bank.

Adding to the complexity is the introduction of the Foreign Exchange Risk Reserve (FERR). In October, the RBI required banks to maintain cash reserves against certain foreign-exchange derivative contracts. This shifted how banks held their cash—moving some from active use into regulatory reserves—which can make the system feel tighter even when total liquidity remains high.

The question then arises: where exactly is this money coming from if households aren’t depositing it? Beyond the swap programmes, banks rely on institutional deposits from corporations and the government, as well as wholesale borrowing through certificates of deposit and bonds. While these sources provide funds, they are often more expensive and more volatile than the stable “core deposits” typically provided by retail savers.

Government spending also plays a critical role. When the government spends money on infrastructure or social schemes, those funds move from the government’s account at the RBI into commercial bank accounts, creating a surge in system-wide liquidity. Conversely, tax collection periods can drain that liquidity back toward the central bank.

From the perspective of the NRI who provided the initial funding, the ability to “recall” this money depends on the account type. For those who used FCNR(B) accounts, the funds are held in foreign currency (like USD) and are repaid in that same currency. However, these typically come with a one-year lock-in period, preventing an overnight mass exit of funds.

For those using NRE (Non-Resident External) accounts, the funds are held in rupees but are fully repatriable. An NRI can request that their rupee balance be converted back into USD and sent abroad. NRO (Non-Resident Ordinary) accounts are more restrictive, generally limiting the repatriation of the principal balance to USD 1 million per financial year.

This repatriation process is a liability for the bank, but not an immediate crisis for the RBI. The swap contracts between the banks and the RBI are generally co-terminus with the deposit’s maturity, often spanning three to five years. This means the “repayment” of the swapped rupees back to the RBI happens over a staggered timeline, not all at once.

The risk of a “sudden stop” or a mass recall is mitigated by these contractual tenors and the regulatory lock-ins. Because the RBI swaps are separate from the bank-customer relationship, a depositor withdrawing money doesn’t automatically trigger a recall of the RBI’s swap; the bank manages that gap through its own liquidity buffers.

Despite these safeguards, the structural shift in Indian savings is a long-term concern. The increasing credit-to-deposit ratio—where banks lend more than they bring in through deposits—forces banks to rely more on the volatile wholesale market. This makes the system more sensitive to the RBI’s absorption operations.

Ultimately, the “sucking” of liquidity by the RBI is a balancing act. By absorbing the surplus generated by foreign-currency swaps and government spending, the RBI prevents an oversupply of rupees that could lead to inflation or a sharp depreciation of the currency.

In summary, the Indian banking system is currently surviving on a cocktail of foreign-currency swaps, institutional funding, and government flows. While the “retail” saver has stepped back, the “institutional” and “non-resident” inflows have filled the void. The RBI’s role is to ensure this temporary surplus doesn’t distort the economy, carefully mopping up the excess while the banks navigate a transition toward a new savings paradigm.