Indian bonds slumped after the central bank said it would sell sovereign notes to drain cash from lenders, adding to the supply of debt in a year when the market is already under pressure from record government borrowing.

India’s central bank will drain 1 trillion rupees ($10.5 billion) from lenders through bond sales, its strongest effort yet to tackle a massive build-up of surplus cash in the banking system that poses inflationary risks.

India’s foreign-exchange reserves rose by the most on record, boosted by a blockbuster overseas capital-raising program, and giving the central bank more ammunition to defend the nation’s struggling currency.

Bets against India’s short-term bonds are rising, with traders wagering that yields will go up on the central bank’s efforts to drain excess cash from the banking system.

India’s central bank used currency swaps to drain cash from banks, according to people familiar with the matter, as excess funds in the financial system climbed to a record.

An index tracking emerging-market equities rallied at the start of the week, closing at its highest level in more than two months, as optimism over new AI models helped counter the drag from increased oil prices.

A record cash surplus in India’s banking system is driving away borrowers.

India’s rupee gained as the central bank garnered $136 billion under its capital-raising measures, far exceeding expectations and further boosting its war chest to defend the currency.

Inflows under the Reserve Bank of India’s special overseas deposit facility have topped the $100 billion mark, the Financial Express newspaper reported Wednesday, citing officials it did not identify.

India’s foreign-exchange reserves climbed to a record high as dollar inflows surged after recent measures by the central bank to attract capital.

India’s central bank is intensifying efforts to support the rupee, emboldened by a jump in its foreign-exchange reserves to contest the pressure from higher oil prices.

HSBC Holdings Plc has purchased at least $3 billion of Indian government bonds since July, deploying a large pool of funds garnered under a special diaspora dollar deposit program, according to people familiar with the developments.

Citigroup Inc. has tied up with Axis Bank Ltd. to finance non-resident Indians investing in foreign-currency deposits with the local lender, according to people familiar with the matter.

Indian bonds fell as the minutes of the central bank’s latest policy meeting stoked fears of interest rates being raised sooner than expected as policymakers emphasized inflation risks.

India has drawn more than $50 billion from its overseas citizens since June, prompting the central bank to close a special window for attracting foreign-currency deposits a month ahead of schedule.

India’s central bank, whose programs are drawing in billions of dollars of overseas cash, is increasingly present in foreign-exchange markets to tamp down rupee volatility, offering a more predictable trajectory for the Asian currency.

Emerging-market assets rose on Friday as a shift in the US interest-rate outlook added to bullish sentiment around artificial intelligence, pushing equities to cap the best week in nearly two months and sending a gauge of currencies on the longest streak of gains since 2024.

India’s central bank sold about $7 billion to defend the rupee last Friday, in what was one of its largest direct interventions in months, according to people familiar with the matter.

India is not planning to reconsider its budget numbers for now as the country has sufficient buffers to deal with pressures stemming from the Middle East conflict, Finance Minister Nirmala Sitharaman said.

India said trade negotiations with the US have helped place it in the “lower tier” of additional tariffs imposed by President Donald Trump’s administration, allowing the country to secure an advantage for key exports.