India's central bank on Friday announced an open market sale of bonds, one of the most potent liquidity-draining tools, hours after its chief said in a media interview that all options remained on the table.
The Reserve Bank of India (RBI) will sell bonds worth an aggregate of 1 trillion rupees ($10.47 billion) in the next fortnight starting on September 16.
In the first tranche on September 17, the RBI will sell bonds maturing from fiscal 2029 to fiscal 2032 worth 500 billion rupees, and will follow it up with 250 billion rupees each of sales each on September 21 and September 28.
Earlier in the day, RBI Governor Sanjay Malhotra said the central bank has enough tools to manage liquidity, other than VRRR (variable rate reverse repos), such as open market operations or FX swaps, and "nothing is off the table."
India's banking system is flush with surplus cash after lenders raised a much larger-than-expected $127 billion under the RBI's special forex mobilisation scheme, which boosted central bank reserves to an all-time high. The surplus averaged around 10.25 trillion rupees in September, nearly 3.8% of deposits.
However, the excess rupee liquidity pushed overnight rates below the floor of the monetary policy corridor and prompted the central bank to step up liquidity absorption at a time when elevated oil prices threaten to add to inflationary pressures.
The RBI had last sold bonds in the secondary market in September 2024, while it had conducted simultaneous purchase and sale of bonds in fiscal 2021 and 2022. Traders said the central bank had last conducted a scheduled debt sale through the auction route in October 2014.
Bets of a stringent liquidity absorption tool rose after the central bank faced twin hurdles, with banks resisting longer-duration operations and dollar-rupee swaps raising hedging costs.
The RBI used two tools this week to drain liquidity: a longer-tenor VRRR and dollar-rupee sell-buy swaps, but both drew limited interest.
"The central bank should have continued with sell/buy swaps, and complimented it with an incremental CRR (cash reserve ratio) hike, especially on deposits garnered under the FX scheme," said VRC Reddy, treasury head at Karur Vysya Bank.
"We felt open market sale of bonds should have been used as the last option."
Traders have highlighted such debt sales could raise government borrowing costs further at a time when surging oil prices and Treasury yields have already pushed the 10-year benchmark bond yield up by 26 bps in the last four weeks.
The central bank could use a market stabilisation scheme, but only as a last resort, with a CRR hike preferred, as bond yields should not get hampered much through these tools, a person familiar with New Delhi's thinking said, requesting anonymity as he is not authorised to speak to media.
