Key Takeaways
- Reserve Bank of India (RBI) Governor Sanjay Malhotra outlines bond sales and FX swaps as tools to manage liquidity.
- Excess liquidity in India’s banking system has pushed overnight rates below the policy repo rate.
- RBI aims to maintain appropriate liquidity conditions amid inflationary pressures from rising oil prices.
Reserve Bank of India (RBI) Governor Sanjay Malhotra has stated that the central bank is not ruling out any tools to manage liquidity, including bond sales and foreign exchange (FX) swaps, to keep the overnight rate aligned with the key repo rate.
Malhotra told CNBC-TV18 that some of the surplus liquidity in the banking system would be withdrawn over time through foreign exchange interventions and banks’ reserve requirements due to rising credit growth.
India’s banking system is currently flush with surplus cash, with lenders raising $127 billion under the RBI’s special forex mobilisation scheme, which has boosted central bank reserves to an all-time high.
The excess rupee liquidity has pushed overnight rates below the policy repo rate, prompting the central bank to step up liquidity absorption.
Bond yields in India have climbed, with the benchmark 10-year bond yield rising to 7.035%, up 6 basis points on the day, and the 5-year bond yield rising as much as 10 basis points to 6.6222%.
The RBI could come up with an open market sale of bonds as early as next week, after facing twin hurdles, with banks resisting longer-duration operations and dollar-rupee swaps raising forex hedging costs, according to four bankers.
Malhotra described the current monetary policy setting as appropriate and said that the nation’s rate-setting panel would assess growth-inflation dynamics when it meets next month.
The central bank has factored elevated food prices into its inflation projections, and the data seen so far has been along expected lines.
India is expected to report its consumer inflation data for August on Monday, with economists anticipating a rise to 4.80%, the highest in 20 months, and up from 4.45% in the previous month.
The central bank’s inflation forecast for the ongoing fiscal year stands at 5%, while its medium-term target is 4%.
Malhotra noted that the RBI is ‘conscious’ of the fact that it waived cash reserve ratio requirements on overseas FX deposits, a requirement applicable in normal circumstances.
We have enough tools to manage liquidity, other than VRRR (variable rate reverse repos), such as open market operations or FX swaps.
Sanjay Malhotra, Governor, Reserve Bank of India
