Don’t think excess surplus liquidity will lead to abnormal lending: SBI's Setty

Mumbai: A day after Axis Bank chief executive Amitabh Chaudhry warned that a surge in liquidity in the banking system, driven by record foreign-currency flows, could lead to abnormal lending, State Bank of India chairman C.S. Setty offered a more sanguine view, saying he does not expect the liquidity surplus to distort credit growth.

Speaking to reporters at the sidelines of the Global Fintech Fest 2026 on Thursday, Setty said the excess liquidity would likely be absorbed over the next three to four months.

Chaudhry had said on Wednesday that foreign currency non-resident bank or FCNR(B) deposits could lead to some abnormal lending because banks would need to deploy the funds. He hoped banks would not deploy all of the liquidity into credit.

Chaudhry’s concern comes as bank credit is growing rapidly. Credit, excluding food loans, rose 18% year-on-year to ₹218 trillion as of 15 August, according to the latest RBI data. He also cautioned that the reported 18-19% growth reflects a favourable base effect and should not be interpreted as evidence of sustained private investment.

Banks raised a record $127.22 billion through FCNR(B) deposits under the RBI’s foreign-exchange swap facility between 5 June and 31 August. That compares with $26 billion raised through a similar scheme in 2013. Including $5.26 billion through offshore foreign-currency borrowings and $3.89 billion through external commercial borrowings, the total inflow was $136.37 billion.

Most of the dollar funds were swapped with the RBI for rupees, injecting a large pool of liquidity into the banking system.

Surplus liquidity in the banking system stood at more than ₹10 trillion on 9 September, up sharply from about ₹2.05 trillion when the scheme was announced on 5 June. Systemic liquidity was around ₹6.70 trillion at the end of August, according to Bloomberg. A day before the announcement, the surplus stood at ₹1.88 trillion.

Mint reported on 5 September that the surplus was likely to remain elevated through the current financial year and perhaps longer, likely prompting the RBI to consider fresh measures to absorb excess liquidity without disrupting bond markets or hurting bank profitability.

To be sure, a prolonged liquidity surplus can keep short-term interest rates below levels consistent with the RBI’s monetary-policy stance, weakening the transmission of its signals. It can also encourage lending and spending, potentially fuelling inflation and increasing risks in financial markets.

RBI has already been actively absorbing excess liquidity through variable-rate reverse repo (VRRR) auctions, announcing operations totalling ₹53.5 trillion between 6 August and 2 September, according to a 3 September report by Bank of Baroda. Given the size and persistence of the surplus, market participants believe the central bank may need to use a combination of instruments, rather than rely solely on short-term liquidity sweeps.