2 hrs ago
RBI Announces ₹1 Trillion Bond Sales Amid Liquidity Surplus
The Reserve Bank of India says banks currently have much more money than they need.
To remove some of this extra money, it plans to sell government bonds worth ₹1 trillion.
The sales will happen in three parts on 17, 21 and 28 September.
The extra money came partly from a foreign deposit scheme that attracted large dollar inflows.
Governor Sanjay Malhotra said the RBI has several ways to control the amount of money in the banking system.
He said the goal is to keep a key overnight interest rate close to the RBI’s policy rate.
The RBI also said it does not view the foreign-exchange hedging arrangement as a cost to the country overall.
Separately, the central bank is considering rules that could stop non-bank lenders from providing some revolving loans.
The Reserve Bank of India will sell ₹1 trillion of government securities in three tranches to absorb surplus banking liquidity.
System liquidity is estimated at a ₹10.4 trillion surplus after exceeding ₹11 trillion earlier this month.
The RBI says the FCNR-B deposit scheme attracted $172.2 billion in two months, while analysts estimated hedging costs of ₹10-12 trillion.
Governor Sanjay Malhotra said the RBI can use OMOs, swaps, reverse repos and potentially other tools to manage liquidity.
The RBI is reviewing feedback on proposed rules that would restrict NBFCs from offering revolving credit facilities.
- Who
- The Reserve Bank of India and Governor Sanjay Malhotra; banks, foreign depositors and non-bank financial companies are also involved.
- What
- The RBI announced ₹1 trillion in open market bond sales to absorb excess liquidity and discussed FCNR-B deposits, hedging costs and proposed NBFC lending rules.
- Where
- India’s banking and financial system.
- When
- The announcement was made on Friday; bond sales are scheduled for 17, 21 and 28 September, while the FCNR-B scheme attracted funds over two months.
- Why
- To withdraw surplus liquidity, keep the weighted average call rate aligned with the repo rate, and manage financial-stability risks.
RBI’s assessment
Market and lender concerns
Cost of the FCNR-B scheme
RBI’s assessment
Governor Sanjay Malhotra said the foreign-exchange hedging arrangement should not be viewed as an RBI expenditure cost and could generate additional revenue when foreign capital is invested in overseas government securities.
Market and lender concerns
Analysts estimated the RBI’s hedging cost at 2.8-3.5%, potentially creating a total burden of ₹10-12 trillion, while some observers compared the pricing with three-year forward premiums.
Revolving credit by NBFCs
RBI’s assessment
The RBI said it never intended to permit non-bank financial companies to offer revolving credit and proposed rules to limit their lending to term loans, citing systemic-stability, loan-evergreening and liquidity concerns.
Market and lender concerns
NBFCs have sought clearer definitions, exemptions for some MSME products, and permission to continue revolving facilities with tighter underwriting and disclosures or under a new framework.
Managing excess liquidity
RBI’s assessment
The RBI said it has sufficient tools, including variable-rate reverse repos, open market operations and swaps, and will use whichever combination is appropriate.
Market and lender concerns
The scale of the surplus and the estimated hedging burden have prompted concerns about whether withdrawing liquidity will create significant costs or require additional measures such as changes to cash-reserve requirements.
Key facts
- Planned bond sales
- ₹1 trillion through three open market operation tranches
- Sale schedule
- ₹50,000 crore on 17 September, followed by ₹25,000 crore each on 21 and 28 September
- Current liquidity surplus
- Estimated at ₹10.4 trillion
- FCNR-B inflows
- The RBI said the scheme attracted $172.2 billion in two months
- Repo rate
- 5.25%
- Weighted average call rate
- 5.02% on 11 September
- Bank credit growth
- Credit rose 18.6% year-on-year to ₹226 trillion as of 15 August
- Cash reserve ratio
- Banks currently maintain 3% of deposits with the RBI
Quotes
Sanjay Malhotra
Governor of the Reserve Bank of India
“I don't see it as a cost. Some people are saying it's a cost, etc. but we need to look at the balance sheet of the whole country of India, not at the balance sheet only of RBI. It's not a cost in terms of an expenditure that RBI is actually doing.”
livemint.com
“That is going to be our goal right now. You can see that it (WACR) is low because of excess liquidity. That liquidity has to be withdrawn.”
livemint.com
Sources
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