India bank liquidity surplus likely to decline by financial year-end, RBI Chief says

Business Recorder reported that Reserve Bank of India Governor Sanjay Malhotra expects the sharp rise in banking system liquidity to fade before the financial year ends. Speaking on Wednesday after the central bank raised its policy rate by 25 basis points, he said the current surplus is well above what the system needs. Since early September, the surplus has averaged 7.3 trillion Indian rupees ($75.49 billion), close to 2.7% of deposits, largely driven by $144 billion of dollar inflows tied to one-off schemes that ended.

Malhotra said the excess cash will ebb through natural factors such as currency leakage and banks' reserve requirements, along with central bank tools like sell/buy swaps, variable-rate reverse repo operations, bond sales in the open market and currency interventions on the spot. He noted that surplus funds can add to inflation, keep short-term borrowing costs down and blunt the impact of rate increases. The RBI also shifted to calibrated tightening.

Madan Sabnavis, chief economist at Bank of Baroda, saw no new liquidity steps as a sign that VRRR operations will stay in use. Some market participants had expected a cash reserve ratio increase, but Malhotra said that step is among the least favoured ways to drain cash. Last month the RBI sold 1 trillion Indian rupees ($10.34 billion) of debt through open market operations, lifting this fiscal year's sales to their highest in more than a decade.