RBI drains ₹2 trillion in a bid to nudge shorter rates higher
India’s central bank drained 2 trillion rupees ($27.4 billion) from the banking system on Friday, as it seeks to push up money-market rates that had crashed below the reverse repo rate.
The cutoff for the 14-day reverse repurchase operation was set at 3.55%, 20 basis points higher than the central bank’s reverse repo rate of 3.35%. A Bloomberg poll of seven traders had estimated it at 3.50%. The central bank got bids worth 3.06 trillion rupees, it said.
The RBI is draining excess cash after money-market rates crashed way below its 3.35%-4.00% interest-rate corridor late last year, spurring calls from investors for it to remedy a situation that could distort banks’ asset pricing. Too sharp a rise could drive volatility, though, and raise concerns that the central bank is withdrawing stimulus support.
“The RBI wants to keep the money market rates in the policy corridor,” said Soumyajit Niyogi, associate director at India Ratings & Research Pvt. “Given the bidding response on Friday, the RBI may do a few more tranches to push up shorter term rates closer to repo rate.”
Shorter bonds sold off after the RBI’s announcement of the operation last week, as the market interpreted it as the start of a sooner-than-anticipated withdrawal of ultra-loose liquidity accommodation. Borrowing costs for Indian companies also surged, a fallout that the RBI would like to avoid amid a nascent growth recovery. The RBI has since met with bank executives to assure them that easy policy will continue.
People’s Bank of China, another Asian central bank, too withdrew cash from the financial system for the first time in six months on Friday, after excess liquidity had pushed an interbank borrowing cost to an all-time low.
RBI Said to Assure Bond Investors Over Its Easy Monetary Stance
The yield on India’s 5.15% 2025 bond has risen 16 basis points to 5.27% this week, and the government’s short-term borrowing costs rose on Wednesday in a sale of treasury bills.
The reverse repo auction alone may not be enough to support money-market rates given the high level of banking-system liquidity, according to ICICI Securities Primary Dealership Ltd. The RBI may need to provide more detail to reinforce its liquidity normalization process, such as laying out steps and a time table for a reversal of its emergency policy accommodation, economists including A. Prasanna wrote in a note this week.
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