The RBI used two tools this week to drain liquidity: a longer-tenor VRRR and dollar-rupee sell-buy swaps, but both drew limited interest.
| Photo Credit:
SHASHANK PARADE
The Reserve Bank of India on
Friday announced an open market sale of bonds, one of the most
potent liquidity-draining tools, hours after its chief said in a
media interview that all options remained on the table.
The RBI will sell bonds worth an
aggregate of ₹1 trillion ($10.47 billion) in the next
fortnight starting on September 16.
In the first tranche on September 17, the RBI will sell
bonds maturing from fiscal 2029 to fiscal 2032 worth ₹500 billion
, and will follow it up with ₹250 billion each of
sales each on September 21 and September 28.
Earlier in the day, RBI Governor Sanjay Malhotra said the
central bank has enough tools to manage liquidity, other than
VRRR (variable rate reverse repos), such as open market
operations or FX swaps, and “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. The surplus averaged
around 10.25 trillion rupees in September, nearly 3.8% of
deposits.
However, the excess rupee liquidity pushed overnight rates
below the floor of the monetary policy corridor and prompted the
central bank to step up liquidity absorption at a time when
elevated oil prices threaten to add to inflationary pressures.
The RBI had last sold bonds in the secondary market in
September 2024, while it had conducted simultaneous purchase and
sale of bonds in fiscal 2021 and 2022. Traders said the central
bank had last conducted a scheduled debt sale through the
auction route in October 2014.
Bets of a stringent liquidity absorption tool rose after the
central bank faced twin hurdles, with banks resisting
longer-duration operations and dollar-rupee swaps raising
hedging costs.
The RBI used two tools this week to drain liquidity: a
longer-tenor VRRR and dollar-rupee sell-buy swaps, but both drew
limited interest.
“The central bank should have continued with sell/buy swaps,
and complimented it with an incremental CRR (cash reserve ratio)
hike, especially on deposits garnered under the FX scheme,” said
VRC Reddy, treasury head at Karur Vysya Bank.
“We felt open market sale of bonds should have been used as
the last option.”
Traders have highlighted such debt sales could raise
government borrowing costs further at a time when surging oil
prices and Treasury yields have already pushed the 10-year
benchmark bond yield up by 26 bps in the last four weeks.
The central bank could use a market stabilisation scheme,
but only as a last resort, with a CRR hike preferred, as bond
yields should not get hampered much through these tools, a
person familiar with New Delhi’s thinking said, requesting
anonymity as he is not authorised to speak to media.
Published on September 11, 2026
