The Reserve Bank of India (RBI) has intensified its liquidity absorption efforts, announcing INR 1 trillion in government bond sales and continuing with variable rate reverse repo (VRRR) operations, FX swaps, and open-market actions. These measures are designed to align money-market rates with the 5.25% policy rate, as highlighted by Commerzbank’s India analysis [1]. Despite these actions, the USD/INR exchange rate remained steady at around 95.96, with the RBI intervening in the foreign exchange market to curb volatility, particularly in response to elevated global crude oil prices [1].
Foreign investors net sold USD 201.7 million of government bonds yesterday, following a USD 503.1 million outflow last Friday, marking the largest single-day outflow in five months. This sell-off was triggered by the RBI's announcement to sell INR 1 trillion of government securities to absorb surplus liquidity in the banking system, which is currently estimated at around INR 10 trillion—the highest since late 2021. The liquidity surplus has been partly fueled by approximately USD 127 billion mobilized through the RBI's special foreign-currency schemes, including FCNR(B) deposits, external commercial borrowings (ECB), and overseas foreign currency borrowings (OFCB) [1].
The RBI is scheduled to issue INR 500 billion of government securities today, followed by INR 250 billion on both 21 and 28 September. The first auction will focus on securities in the shorter and intermediate segments of the curve, providing banks with assets matching the maturity of their FCNR(B) deposit liabilities. The bond sales are seen as a more durable method of liquidity withdrawal compared to VRRR operations, which have seen weak participation—yesterday’s INR 1 trillion VRRR auction attracted only INR 403 billion in bids [1].
Governor Sanjay Malhotra has emphasized the RBI’s flexibility in using various instruments to manage liquidity and align money-market rates with the policy rate. Looking forward, the INR 1 trillion bond sales will absorb only about one-tenth of the current liquidity surplus, indicating a measured initial approach. Additional bond sales or liquidity-absorption measures may be implemented if the surplus persists. With the policy rate expected to remain unchanged at 5.25% at the next RBI meeting on 7 October, near-term policy focus will likely stay on liquidity sterilization. The liquidity withdrawal is expected to exert greater upward pressure on the shorter and intermediate portions of the yield curve, as evidenced by the 5-year government bond yield rising 24 basis points to 6.76% [1].
CONCLUSION
The RBI’s measured liquidity withdrawal through bond sales and FX intervention has stabilized the rupee and aligned money-market rates closer to the policy rate, despite significant foreign investor outflows. While only a fraction of the liquidity surplus is being absorbed initially, further actions may follow if excess persists. Market attention remains focused on liquidity management, with short- and intermediate-term yields rising and the policy rate expected to stay unchanged.