Bond sales, FX swaps among RBI's options to drain excess liquidity, governor tells

MUMBAI/BENGALURU: The Reserve Bank of India is not taking any tools off the table to manage liquidity and keep the overnight rate aligned with the key repo rate, Governor Sanjay Malhotra told CNBC-TV18 on Friday, adding that bond sales and FX swaps were among the options.

Some of the surplus liquidity in the banking system would be withdrawn over time through foreign exchange interventions and banks’ reserve requirements due to rising credit growth, Malhotra said, adding that the central bank’s objective was to maintain appropriate liquidity conditions.

“We have enough tools to manage liquidity, other than VRRR (variable rate reverse repos), such as open market operations or FX swaps,” Malhotra said. “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.

However, the excess rupee liquidity has pushed overnight rates below the policy repo rate and prompted the central bank to step up liquidity absorption at a time when elevated oil prices threaten to add to inflationary pressures.

India’s banking liquidity surplus hovered at over 10 trillion Indian rupees this week.

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 will obviously not have a higher CRR or CRR in some other form on those deposits,” he said.

RBI’s liquidity mop-up via FX swaps offers a channel of support for rupee

Bond yields climb

Indian bonds extended their declines after the mention of debt sale as an option to remove rupee liquidity, with yields at their highest levels in more than three months.

The benchmark 10-year bond yield rose to 7.035%, up 6 bps on the day, while its 5-year counterpart rose as much as 10 bps 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, four bankers said on Friday.

Policy setting ‘appropriate’

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, he added.

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India will 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%.

It is not appropriate to look at just average inflation in assessing monetary policy but also its composition, Malhotra said.

Commenting on surging bond yields globally, India’s central bank chief said elevated debt loads and inflation expectations are contributing to the rise in yields overseas but India’s conditions are different.

India’s 10-year bond yield has risen 37 bps since the Iran war began in February while its counterparts in the U.S. and Japan have climbed 98 bps and 87 bps, respectively.