Reserve Bank of India halves liquidity surplus through bonds and swaps

The Reserve Bank of India reduced the banking system’s liquidity surplus by about 56% from its early-September peak, bringing the overhang down to ₹4.92 trillion. The decline from a record ₹11.16 trillion in the first week of September came as the central bank combined bond sales, foreign-exchange operations and short-term cash absorption, helped by seasonal tax outflows. The pullback followed exceptional foreign-currency inflows that had injected rupees into the banking system. The latest figure leaves the surplus at less than half of its peak.

The surplus expanded after banks mobilised large foreign-currency deposits under a special USD-INR forex swap facility introduced by the RBI. Official data released on 21 September showed total inflows of $143.6 billion, including about $133 billion from Foreign Currency Non-Resident deposits. The RBI had accepted dollars from banks and supplied rupees, strengthening foreign-exchange buffers while creating excess domestic liquidity.

MULTIPLE TOOLS DRAINED EXCESS CASH

The central bank sold ₹750 billion of government bonds in open market operations on 17 and 21 September, with a further ₹250 billion sale remaining in its ₹1 trillion programme. Banks also placed about ₹3.4 trillion with the RBI through reverse-repurchase operations. In parallel, foreign-exchange sell-buy swaps removed rupees from the market while shifting the central bank’s forward-dollar position.

Governor Sanjay Malhotra has said the RBI aims to keep the overnight rate aligned with the policy repo rate. Excess liquidity can weaken the transmission of tighter interest rates by depressing short-term funding costs. Economists have pointed to a weaker rupee and elevated oil prices as inflation risks.

POLICY TRANSMISSION REMAINS IN FOCUS

Economists have increasingly flagged the possibility of RBI rate increases, while market participants are watching for additional bond sales and swap operations. A treasury official quoted by Business Standard said another OMO of around ₹1 trillion could be sufficient over the coming months.

The RBI’s Monetary Policy Committee is due to announce its next decision in October.