RBI may increase debt sales to drain surplus liquidity after 9 years

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

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, delaying increases in lending rates and supporting demand for government bonds.

Earlier in the day, the RBI absorbed cash equivalent to nearly 0.2% of total banking-system deposits, selling bonds worth 500 billion rupees ($5.21 billion) under an auction-based open market sale, its first net sale since November 2017.

The RBI sold papers maturing between fiscal 2029 and fiscal 2032 at cutoff yields that were slightly above market estimates. It is due to sell papers worth 250 billion rupees each in the next two weeks.

“The RBI will likely draw down surplus liquidity through one more tranche of OMO sales or a CRR hike ahead of the October policy review, to ensure any rate action delivers its intended transmission,” said Alok Sharma, head of treasury at ICBC.