The Reserve Bank of India's aggressive intervention to defend the rupee has drained nearly $20 billion from the banking system over the past five weeks, bankers estimate, pushing borrowing costs higher despite falling rates. The surplus in the banking system fell to Rs 7,650 crore on September 25 from nearly Rs 1.95 lakh crore on August 24, according to Reuters calculations based on central bank data.

Market participants estimate the RBI sold around $19.8 billion in the foreign exchange market during this period to support the currency. The intervention has tightened money-market conditions: the weighted average lending rate on fresh rupee deposits rose 25 basis points to 7.05% in August, signalling higher funding costs for banks.

The RBI's FX operations absorb rupee liquidity from the system as it sells dollars, tightening conditions even as the policy rate path remains under watch. With the central bank potentially considering a rate hike, banks and borrowers face a double squeeze of shrinking surplus liquidity and elevated market rates.