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Informist, Wednesday, Oct. 7, 2026

 

By J. Navya Sruthi and Aaryan Khanna

 

MUMBAI – The Reserve Bank of India does not seem keen to drain durable liquidity from the banking system in a hurry using measures like further open market operations to sell bonds, dealers said. With RBI Governor Sanjay Malhotra advocating only for the weighted average call rate to remain near the repo rate, traders expect liquidity to remain in a comfortable surplus through the upcoming festival season.

Traders had entered the policy expecting more OMO sales of up to INR 1.5 trillion to be announced, along with the outside chance of a cash reserve ratio increase for banks. The banking system liquidity surplus rose to a record high of INR 11.16 trillion on Sept. 6 due to robust inflows through foreign currency non-resident (bank) deposits. Net durable liquidity as on Sept. 15 was at a record high of INR 13.94 trillion.

 

In the latter half of September, the RBI sold gilts worth INR 1 trillion through three OMO auctions. Its foreign exchange intervention may have also totalled around $20 billion in the month. With this, the central bank has likely brought down system liquidity to a level it is comfortable managing through transient measures. September's actions seem to have removed the excess built up from FCNR(B) inflows topping all estimates, reaching $133 billion by Aug. 31, dealers said.

 

"While the remaining level is above what would be considered normal, the upcoming festival season would likely be entrusted to utilise it," SBI Capital Markets Ltd. said in a report. "Nevertheless, the RBI could continue with its calibration operations now and then."

 

Expectedly, the Monetary Policy Committee Wednesday hiked the repo rate by 25 basis points to 5.50%. Malhotra noted that liquidity in the banking system rose to an average daily surplus of INR 5.9 trillion since Aug. 5 from INR 1 trillion between Jun. 5 and Aug. 5.

  

Malhotra said the central bank will use an appropriate mix of liquidity management tools and strive to align the weighted average call rate with the policy repo rate. At the post-policy press meeting, the governor said no liquidity-draining measures are off the table but emphasised that a hike in cash reserve ratio will be the central bank's last preferred mode of taking out liquidity.

 

Dealers expect the RBI to conduct longer-term variable rate reverse repo auctions rather than OMOs, which will effectively set a floor for the weighted average call rate without effectively draining liquidity durably, dealers said. The central bank said it will conduct a 29-day VRRR auction for INR 2 trillion Thursday and has also allowed early withdrawal up to two days before the actual reversal.

 

"It is not very long that we expect these surplus liquidity conditions to last," Malhotra said. "The CIC (currency in circulation) leakage that happens, then the sell-buy swaps that we have already done, we are doing. We have other tools like OMO (to sell bonds), the VRRRs that we are using, the spot intervention that we do to support the rupee. I do not expect that the liquidity is going to remain in such high surplus mode for a very long period of time," he said.

DESTABILISING ACTION

The governor's focus on its forex intervention did not escape the market. With forex actions seen to be the RBI's primary tool to drain rupee liquidity, the dollar-rupee forward premia shot up Wednesday. The one-to-three-month premia rose 74-108 bps while the benchmark one-year forward rate rose 36 bps to 3.82%.

 

The RBI's dollar sales in the spot market and dollar-rupee sell-buy swaps drain rupee liquidity from the banking system. India's forex reserves have fallen over $50 billion from a record high of $785.71 billion as on Sept. 4 to $734.6 billion as on Oct. 2, according to data the RBI announced Wednesday.

 

"RBI will drain excess liquidity through FX operations, and it will be around 1–1.5% of NDTL (net demand and time liabilities) by the end of the festival season," a senior official at a major state-owned bank said. As of Tuesday, the liquidity surplus was nearly 2% of net demand and time liabilities.

    

Foreign exchange dealers looked to get ahead of the RBI's expected action by buying forward dollars, hoping to take the opposite side of that trade at a profit when the RBI intervenes to drain rupee liquidity. The premia are expected to remain high due to the RBI's action and may see another rise during the festival season when rupee liquidity starts draining out in earnest, dealers said. 

 

The high forward rates will also have a follow-on impact on domestic markets, dealers said. Banks may refrain from subscribing to VRRR auctions as receiving forward dollars with the rupees nets them a return of over 8.5%, compared with near 5.50% at the auction. As forward premia climb, traders may also pay overnight indexed swap rates while selling forward dollars. The RBI may have to resort to domestic liquidity operations such as OMO sales just to avoid injecting further dollars into the banking system, dealers said.  End

 

US$1 = INR 96.78

 

Edited by Shubhayan Bhattacharya

 

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