We hear about money supply, repo rates, RBI moves, and credit growth all the time. But what do these terms really mean for a layperson?
Like many of you, I’ve often had basic but essential questions. Instead of shying away, I decided to ask them openly—and then answer them through research, reflection, and writing in my own lens, with formatting polished for clarity. My goal: to remove hesitation around “simple” questions and provide practical, understandable explanations.
In Part 1, we covered ~25 FAQs, from the basics of money supply to how banks create credit, and finally, how RBI tools influence liquidity, lending, and the broader economy.
This is Part 2, featuring 15 FAQs that extend the discussion to foreign capital flows (FII/FDI), their impact on India’s money supply, money-market rates, and real-world banking examples.
Q1. What does FII buying and selling mean?
- FII Buying: Foreign Institutional Investors (mutual funds, hedge funds, pension funds, insurance companies) bring foreign currency (e.g., USD) into India, convert it into INR, and purchase Indian stocks/bonds.
- FII Selling: They sell Indian assets, convert INR back to USD, and repatriate abroad.
Q2. What does FDI buying and selling mean?
- FDI Buying: Long-term investments by foreign companies in Indian businesses (e.g., Walmart investing in Flipkart).
- FDI Selling: Divesting or reducing a stake in an Indian company.
Key Difference:
- FII = short/medium-term, liquid portfolio flows.
- FDI = long-term, stable, strategic capital.
Q3. Does money physically move in FII/FDI flows?
No “bags of dollars.” Flows occur electronically via RBI-regulated banking channels.
- USD is exchanged for INR in India’s forex markets.
- On exit, INR is converted back to USD and sent abroad.
Q4. How is this different from USD being “capital free”?
- USD: Global reserve currency, freely convertible.
- INR: Subject to capital controls—cross-border flows are regulated by RBI/SEBI to prevent volatility and maintain stability.
Q5. Quick refresher: Money Supply measures in India
- M0 (Reserve Money): Currency in circulation + RBI vault cash + banks’ deposits with RBI.
- M1: Currency in circulation + demand deposits (current + savings).
- M3 (Broad Money): M1 + time deposits (fixed deposits, recurring deposits).
M3, often called “broad money,” is used for policy tracking.
Q6. Does FII buying/selling directly change M0 or M3?
Case 1: FII Buying (Capital Inflow)
- FII brings USD.
- USD → INR via banks.
- If RBI does nothing → banks sell USD, INR supply rises → M3 may increase.
- If RBI intervenes (sterilization) → absorbs INR liquidity via bonds or CRR/SLR adjustments → M0/M3 stable.
Case 2: FII Selling (Capital Outflow)
- FIIs sell shares → get INR.
- Convert INR → USD for repatriation.
- RBI may release USD from reserves and absorb INR → M0/M3 may shrink.
Q7. Key insight
- FII flows affect banking system liquidity, not directly M0.
- Sterilization matters:
- Without sterilization → FII inflows increase M3.
- With sterilization → RBI neutralizes the impact.
Q8. Key RBI and money-market rates (Late August 2025)
| Rate | Level | Purpose |
|---|---|---|
| Marginal Standing Facility (MSF) | 5.75% | Ceiling of liquidity corridor |
| Repo Rate | 5.50% | Policy rate at which RBI lends to banks |
| Reverse Repo / Standing Deposit Facility (SDF) | 5.25% | Floor of liquidity corridor |
| Call Money Rate | 5.48% | Overnight interbank unsecured lending rate |
| Weighted Average Call Rate (WACR) | ~5.47% | Weighted average of all overnight call money transactions in a day across banks. |
| Tri-Party Repo System (TREPS) | ~5.20% | Overnight liquidity rate is usually below call money |
Why it matters:
- Liquidity Adjustment Facility (LAF) corridor = SDF → Repo → MSF.
- TREPS < Call Money < Repo < MSF
- RBI keeps market rates (WACR, TREPS) within this corridor for stable policy transmission.
- TREPS < Reverse Repo → System flooded with cash.
Q9. Comparing HDFC Bank and IDFC First Bank
| Metric | HDFC Bank | IDFC First Bank |
|---|---|---|
| Total Deposits | ₹27,147 B | ₹2,425 B |
| CASA | ₹8,289 B | ₹1,182 B |
| CASA Ratio | 35% | 46.9% |
| Retail Deposits | 83% | 79% |
| LCR | 119% | 117% |
| CAR | 19.6% | 15.48% |
| PCR | ~80%+ | 72.3% |
| M3 Contribution | ~9.5% | ~0.88% |
Insights:
- IDFC First Bank has higher CASA → lower-cost liquidity.
- HDFC Bank has a larger capital buffer → higher stability.
- Both contribute to M3; HDFC more in absolute terms.
Q10. Example — How HDFC Bank Deposits & FII/FDI Flows Influence M3
Scenario: Late August 2025
Overnight Liquidity
- Withdrawal of ₹500 crore → Bank borrows in call money → WACR rises slightly.
- RBI maintains rates within the corridor: SDF 5.25%, Repo 5.50%, MSF 5.75%.
FII/FDI Flows
- Secondary market FII purchase: no direct effect on bank deposits/M3.
- Primary market purchase (FPO/IPO): deposits rise → may increase M3.
- Forex transactions → temporary liquidity impact only.
Key Takeaways:
- Secondary market → no effect on M3.
- Primary market → increases deposits/liquidity → may increase M3.
- CASA withdrawals → short-term liquidity impact.
- RBI tools maintain overnight rates within corridor.
Q11. How to know if the banking system has an overnight liquidity surplus?
- Call Money / TREPS below repo rate → banks have surplus.
- Banks park excess funds with RBI → SDF/reverse repo.
Shortcut:
- Surplus: Banks lend to the RBI.
- Deficit: Banks borrow from the RBI.
Q12. Recent trends in the banking system liquidity
- Dec 2024 – Mar 2025: Deficit
- Mar 29, 2025: Shift → Surplus (~₹1.42T absorbed)
- Apr–Jul 2025: Surplus grew → ₹4T → ₹9T
Sharp move from tight liquidity to abundant surplus in FY26.
Below zero = deficit, Above zero = surplus, Turning point → Mar 2025
Q13. What does “surplus liquidity” mean?
| Condition | Bank Action | Market Signal | Implication |
|---|---|---|---|
| Surplus | Park excess with RBI | Overnight rates below repo | Easier credit, risk of inflation |
| Deficit | Borrow from RBI | Overnight rates near repo/MSF | Tight credit, higher cost |
Shortcut: Lending to RBI = surplus; borrowing from RBI = deficit.
Q14. Why surplus liquidity may not translate into lending
Even if banks have excess liquidity:
- Demand-side constraints: Borrowers may be hesitant to take on loans due to uncertainty, high debt, or weak demand.
- Creditworthiness: Banks may reject borrowers with poor credit or risky business profiles.
- Bank incentives: Low-risk lending may not be profitable; banks may prefer parking money with the RBI.
- Regulatory/structural barriers: Approvals, collateral, or compliance slow disbursals.
- Market expectations: Borrowers may delay borrowing if rates are expected to fall further.
Surplus liquidity is necessary but not sufficient for credit growth. Lending requires demand, creditworthy borrowers, and attractive risk-return dynamics.
Q15. Key takeaway
Foreign flows (FII/FDI) and bank deposits influence liquidity and M3, but RBI policy tools, bank behavior, and borrower demand ultimately determine how this translates into lending and broader economic activity.