Indian Rupee: RBI liquidity withdrawal tempers risks – Commerzbank

The Reserve Bank of India (RBI) is temporarily reducing its liquidity availability to curb risks, according to Commerzbank's India analysis. The bank is doing this through various measures, including government bond sales of INR1trn, VRRR operations, FX swaps, and open-market actions. These steps aim to align money-market rates with the 5.25% policy rate set by the RBI.

Despite higher yields, the USD/INR remained near 95.96 as the central bank intervened to reduce volatility. Foreign investors sold USD201.7mn of government bonds yesterday, the largest single-day outflow in five months, following a similar trend last Friday. The liquidity surplus stands at INR10trn, the highest since late 2021, driven by USD127bn mobilized through special foreign-currency schemes.

The RBI is set to issue INR500bn of government securities today, followed by INR250bn on 21 and 28 September. This bond issuance provides a more stable way to withdraw liquidity than the previously weak VRRR operations. RBI Governor Sanjay Malhotra indicated that the central bank will use a mix of VRRRs, open-market bond sales, and FX swaps to manage liquidity based on market conditions.

The INR1tn bond sales will only absorb around one-tenth of the current liquidity surplus, suggesting a measured approach initially. Further bond sales or other liquidity-absorption measures may be implemented if the surplus persists. The policy rate is expected to remain unchanged at 5.25% at the RBI's next meeting on October 7, with liquidity withdrawal likely to exert upward pressure on the shorter and intermediate portions of the curve.