The Reserve Bank of India will sell $2.6 billion of bonds on Tuesday to drain extra cash from the banking system. The regulator also tightened daily cash reserve requirements starting October 16. RBI Governor Sanjay Malhotra said the surge in liquidity would not be a long-term phenomenon for the country.
MUMBAI, Oct 9 (Reuters) - India's central bank announced the next leg of open market bond sales and tightened daily maintenance of cash reserve ratio on Friday in a bid to further drain rupee liquidity from the banking system.
The Reserve Bank of India will sell 250 billion rupees ($2.58 billion) of bonds on Tuesday through open market operations, an effective liquidity-draining tool. The regulator also mandated that banks would need to maintain 99% of the daily CRR from October 16 against 90% earlier.
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The moves come days after the RBI raised its key policy rate for the first time in nearly four years and signalled more rate hikes.
The central bank did not announce any liquidity draining measures in the policy. RBI Governor Sanjay Malhotra said the surge in liquidity would not be a long-term phenomenon and a large amount of liquidity would get absorbed within this financial year the ends in March.
Last month, the RBI sold bonds worth 1 trillion rupees, the highest net sale in over a decade.
Markets should be prepared for the liquidity surplus to fall below 1% of deposits and potentially lie in the 0%-0.5% of deposits range in the coming quarters, ICICI Securities Primary Dealership said in a note.
"OMO sales have led to bear flattening of the yield curve," the primary dealer said.
India's banking system liquidity surplus has averaged more than 7 trillion rupees ($72.37 billion) on a daily basis from September 1, amounting to 2.6% of deposits.
The RBI will sell bonds maturing from fiscal 2030 to fiscal 2035, including 7.88% 2030, 6.10% 2031, 7.95% 2032, 7.26% 2033, 7.18% 2033 and 7.10% 2034 notes.
Banks park 3% of their deposits with the RBI under CRR, and do not earn any income on these funds.
($1 = 96.7300 Indian rupees)
Updates with additional details throughout, changes media identifier
Reporting by Dharamraj Dhutia and Surbhi Misra; Editing by Sonia Cheema and Mrigank Dhaniwala