India to drain US$10.5 billion from banks as excess cash surges

[NEW DELHI] The Reserve Bank of India will drain 1 trillion rupees (US$10.5 billion) from lenders through bond sales, stepping up its efforts to tackle a massive build-up of surplus cash in the banking system that poses inflation risks.

The central bank will conduct the bond sales in three tranches to be held on Sep17, Sep 21 and Sep 28. The move comes after surplus cash with banks rose to a record high of around 11 trillion rupees following massive inflows under the central bank’s recent capital-raising windows. 

In the first auction on Sep 17, the RBI has offered to sell notes maturing in 2029, 2030, 2031 and 2032.

The extra supply of debt is likely to push up sovereign bond yields on Tuesday, after having climbed in line with global trends on Friday. Indian bond and currency markets are shut on Monday for a public holiday.

“We’re expecting more measures going ahead as well, including more bond sales” said Puneet Pal, head of fixed income at PGIM India Mutual Fund. “The liquidity surplus needs to be reduced as it is distorting the curve,” he said, pointing to how borrowing costs had recently dropped well below the central bank’s benchmark policy rate.  

The RBI has a large stock of government bonds it can sell to drain liquidity. Its holdings climbed more than 40 per cent last fiscal year to about 23 trillion rupees, equivalent to roughly 18 per cent of outstanding central government securities, according to Citigroup. That is significantly higher than usual, the lender said. BLOOMBERG