India bond traders see RBI stepping up liquidity withdrawal as it paves way for rate hikes

Indian government bond traders expect the Reserve Bank of India to soak up a sharp rise in surplus banking liquidity using longer-lasting tools, according to Business Recorder. The surplus has grown because banks raised foreign currency non-resident deposits and swapped them with the central bank under a time-limited scheme meant to support the rupee. Up to August 21, the arrangement had attracted $65 billion after its June 5 start.

So far in August, the banking surplus has averaged above 3.4 trillion rupees, or $36 billion, and could widen once the final deposits are swapped before month end. Bond redemptions will add over 630 billion rupees within a fortnight, potentially pushing the surplus past 5 trillion rupees during September. Six treasury officials expect the central bank to rely on a wider mix of instruments that drain cash over longer terms.

Abhishek Upadhyay of ICICI Securities Primary Dealership said the central bank may need wider tools to keep overnight rates from sliding toward the lower bound. Alok Singh of CSB Bank put the chance of longer-duration auctions above 50%, though he sees an interim cash reserve ratio increase only if inflation hits 6%. The central bank held its policy rate steady earlier this month, but minutes published last week revealed policymakers had discussed possible hikes later in the year.