The RBI’s foreign currency assets have declined from USD 595 bn as of end Q1 FY26 to USD 582 bn as of end Q2 FY26 will have rupee liquidity impact
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The RBI’s foreign currency assets have declined from USD 595 bn as of end Q1 FY26 to USD 582 bn as of end Q2 FY26. The latest available data for the week ending Oct 17th shows a further decline to USD 570 bn. The pace of drawdown in RBI’s FCA has increased since August, coinciding with the imposition of the 50% tariff by the US. With the punitive tariff on India imparting an idiosyncratic downside to the INR, the drawdown in RBI’s FCA reflects its FX intervention to smooth volatility.
If India and the US are unable to negotiate a trade deal, then the likelihood of continued dollar selling by the RBI could take core liquidity from a surplus of 2.0% of NDTL in Q2 FY26 to a deficit of 0.4% by Q4 FY26. In this case, the RBI could sterilize its FX intervention via Rs 3.5 tn OMO purchases by Q4 FY26. However, a more likely scenario is one where the India-US trade deal is announced by Nov-25 (as per media reports). In this case, the pressure on INR would subside, leading to a core liquidity surplus of 0.9% by Q4 FY26. This would call for a modest liquidity replenishment of Rs 500 bn via OMO purchases.