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

According to Business Recorder, Indian central bank governor Sanjay Malhotra said the Reserve Bank of India has kept every liquidity instrument open to keep overnight rates in step with the repo rate. Speaking to CNBC-TV18 on Friday, he said the RBI has sufficient tools beyond variable rate reverse repos, naming open market operations and foreign exchange swaps. He also indicated that surplus cash would be drawn out gradually through forex interventions and bank reserve requirements as credit growth picks up.

The surplus traces back to lenders bringing in a far bigger sum than forecast, $127 billion through the special forex scheme, which pushed central bank reserves to a record high. Surplus rupee cash has dragged overnight rates under the policy repo rate, and the banking system held a surplus above 10 trillion Indian rupees. Malhotra acknowledged the central bank had exempted overseas FX deposits from cash reserve ratio requirements, and said those deposits would not face higher CRR or a CRR in any other form.

Bond yields moved higher after the governor's remarks, with the 10-year yield at 7.035%, up 6 bps, and the 5-year at 6.6222%. Malhotra called the current policy stance appropriate, with the rate-setting panel set to review growth and inflation next month. Economists forecast August consumer inflation, due Monday, at 4.80%, a 20-month high, up from 4.45% in the prior month.