The Reserve Bank of India said on Friday that it would sell 250 billion rupees worth of government bonds on Tuesday through open-market operations, equivalent to about 2.58 billion dollars, while raising banks’ daily cash reserve compliance requirement to 99% from October 16, in a bid to absorb more rupee liquidity from the banking system.
Liquidity tightening after rate hike
The measures come days after the central bank raised its key interest rate for the first time in about four years, while signaling that further rate increases could be implemented.
Central bank Governor Sanjay Malhotra had said the current increase in liquidity would not last in the long term and that a large portion of it would be absorbed during the financial year ending next March.
Excess liquidity exceeds 7 trillion rupees a day
Average excess liquidity in India’s banking system has exceeded 7 trillion rupees a day since September 1, equivalent to 2.6% of total deposits. The central bank sold a net 1 trillion rupees worth of bonds in September, its largest net sale of its kind in more than a decade.
The bonds scheduled for sale include maturities extending from financial year 2030 to financial year 2035. Open-market operations are used to absorb liquidity from markets.
Surplus expected to fall as yields converge
ICICI Securities Primary Dealership expects excess liquidity in the markets to fall below 1% of deposits, with the possibility of declining to a range of zero to 0.5% of deposits over the coming quarters.
The company added that bond sales through open-market operations had flattened the yield curve, reflecting narrower spreads between short- and long-term bond yields. Under cash reserve ratio requirements, banks hold an amount equivalent to 3% of their deposits with the central bank without earning a return on those funds.
