The Reserve Bank of India moved to absorb approximately ₹1 trillion ($10.5 billion) of excess liquidity from the banking system, escalating its response to an unusually large cash surplus that has pushed short-term market rates below the policy rate and complicated monetary management as inflation risks increase.
The Reserve Bank of India will conduct open-market sales of government securities as it seeks to bring banking-system liquidity back towards levels consistent with its monetary policy stance. The move follows an exceptional increase in liquidity after Indian banks raised approximately $127 billion through a special foreign-exchange mobilisation scheme, contributing to a banking-system surplus exceeding ₹10 trillion.
The scale of the excess cash has become increasingly significant for monetary policy transmission. When banking-system liquidity remains substantially above requirements, overnight borrowing rates can trade below the Reserve Bank of India’s policy rate, weakening the central bank’s ability to transmit its intended monetary stance through financial markets.
RBI Governor Sanjay Malhotra said the central bank has several instruments available to manage the surplus, including open-market operations and foreign-exchange swaps. The yield on India’s benchmark 10-year government bond rose 5 basis points to 7.01%, above 7% for the first time since 3 June.
LIQUIDITY MEETS INFLATION RISK
The intervention comes ahead of the Monetary Policy Committee’s 5–7 October meeting, at which a section of the market expects a rate hike; State Bank of India economists called for a 25-basis-point increase, citing incipient signs of a broadening of CPI inflation.
Net liquidity in the banking system was in surplus by ₹10.43 trillion on Thursday, 10 September, according to RBI data, while core liquidity was estimated at ₹13–14 trillion. Malhotra said the overall goal remained to align the weighted average call rate, the operating target of monetary policy, with the repo rate of 5.25%; the call rate settled at 5.02% on Friday.
WHY IT MATTERS
The OMO sales will be conducted through multi-security auctions under the multiple price method: ₹50,000 crore on 17 September, followed by ₹25,000 crore each on 21 and 28 September.
The announcement followed a muted response to the RBI’s second attempt to drain liquidity through a longer-tenor variable rate reverse repo auction, and market participants said the OMO sales were expected to push bond yields higher.
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