India RBI may increase debt sales to drain liquidity after first such auction in 9 years
MUMBAI: Indian bond traders expect the central bank to step up bond sales for liquidity absorption, as policymakers likely seek to strengthen transmission of expected rate hikes, after the first such auction in nine years recorded strong interest. Excess banking-system liquidity can weaken monetary-policy transmission, reducing banks’ need to borrow at the Reserve Bank of India’s policy rate,…
Indian bond markets anticipates the Reserve Bank of India (RBI) will ramp up debt sales to soak up excess liquidity, following the inaugural auction in nine years that attracted significant interest. The central bank's move aims to ensure the effective transmission of anticipated rate hikes, as an overabundance of banking-system liquidity can weaken the impact of monetary policy on deposit rates, delaying lending rate increases and bolstering demand for government bonds.
Earlier, the RBI absorbed roughly 0.2% of total banking system deposits through a 500 billion rupee ($5.21 billion) auction-based open market sale, the first net sale since November 2017. The bank plans to sell another 250 billion rupees worth of bonds in the coming two weeks. ICBC's Alok Sharma suggests the RBI may reduce surplus liquidity via additional open market operations (OMO) sales or a cash reserve ratio (CRR) hike prior to the October policy review, with traders expecting a 25-basis-point rate hike at the meeting.
The banking sector's liquidity surplus peaked at 11.6 trillion rupees on September 6, bolstered by one-off central bank measures to attract foreign currency, but has since decreased by a third to around 7.4 trillion rupees due to tax outflows and the RBI's aggressive foreign exchange interventions. The central bank has resorted to longer-duration variable-rate reverse repo auctions, transitioning to a more permanent form of cash withdrawal as demand fell short of expectations.
Experts believe the RBI will withdraw around 2 trillion rupees through bond sales, along with the initiation of the rate-hike cycle in October.
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