By Dharamraj Dhutia
MUMBAI (Reuters) -The Reserve Bank of India’s aggressive dollar sales to defend the rupee are draining liquidity from the banking system, prompting calls for bond purchases to ease the strain, ten traders and economists told Reuters.
The RBI has scope to buy 1 trillion–1.5 trillion rupees ($11.3–$17.1 billion) of government bonds, citing a shrinking liquidity surplus even as the central bank signals policy space to support growth, they said.
Predictable and surplus liquidity is important to keep rates low in the Indian economy which is facing pressures from U.S. tariffs and slow capital flows.
“The potential OMO purchase space has expanded to 1-1.5 trillion rupees up from 500-700 billion rupees,” Samiran Chakraborty, chief India economist at Citi wrote in a note on Monday.
“We anticipate an OMO announcement following a ‘price’ signal from rising yields/overnight rates or potentially at the December MPC meet to offset a status-quo on rates,” he said.
The central bank will meet banks and dealers this week, Reuters reported.
The RBI had last conducted OMO purchases in May, and bought bonds worth 2.4 trillion rupees in the first half. Last week, the central bank rejected bids for a bond auction, signalling its discomfort with higher yields.
India’s banking system liquidity surplus fell to its lowest this fiscal year in October, despite inflows from a cash reserve ratio cut announced in June.
Durable liquidity declined from 5.2 trillion rupees ($59 billion) on Sept. 19 to 3.6 trillion rupees on Oct. 17 and could slip further to around 3.3 trillion rupees by Oct. 24, Citi said in a note.
Traders estimate the RBI’s dollar sales to defend the rupee have drained 1.5–2 trillion rupees from the system this month. The rupee hit a record low of 88.80 in October and has stayed near that level, supported mainly by central bank intervention.
Short-term bond yields and money market rates have stayed firm despite sharp RBI rate cuts. Yields fell on Tuesday amid speculation of central bank bond purchases.
IDFC First Bank expects the RBI to buy about 2 trillion rupees of bonds over the next five months.
“Despite not very favourable demand-supply dynamics, some of the upward pressure on yields could reduce due to expected OMO purchases as support from rate cut expectations will be limited as majority of the cycle is behind us,” said Gaura Sen Gupta, chief economist at IDFC First Bank.
($1 = 88.5950 Indian rupees)
(Reporting by Dharamraj Dhutia; Editing by Nivedita Bhattacharjee)
