IndusInd case: Who is India's real lender of last resort?

Nudging PSBs to help shore up the liquidity of banks raises questions about RBI's regulatory playbook

- BHARGAVI ZAVERI-SHAH & HARSH VARDHAN

The recent IndusInd episode raises several questions about how the Reserve Bank of India (RBI) uses its powers during financial stress. Beyond the immediate concerns of governance lapses and liquidity management, RBI's decision to rely on public sector banks (PSBs) to provide liquidity support, rather than directly intervening as the lender of last resort (LoLR), merits close examination.

On 10 March, IndusInd Bank disclosed that an internal review had uncovered a discrepancy in its rupee-dollar swap accounting. The irregularity would erode the bank's capital base by 2.5%. The management sought to reassure investors and depositors, stating that the impact would not threaten the bank's stability, and its promoter group bolstered confidence by offering to inject capital if needed. Still, the disclosure triggered concerns among corporate and institutional depositors. Given the size and concentration of their holdings, these clients were highly sensitive to market sentiment and some began to withdraw their funds. In response, on 15 March, RBI issued a public statement affirming the bank's soundness—a move seemingly aimed at stemming further deposit flight and preventing a full-blown bank run.